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PULLING THE RABBIT OUT OF THE GRAT HAT: SOME OF THE MOST

CREATIVE STRUCTURAL GRAT PLANNING IDEAS WE SEE OUT THERE©

S. Stacy Eastland

Houston, Texas

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Goldman Sachs does not provide legal, tax or accounting advice. Clients of Goldman Sachs should

obtain their own independent tax and legal advice based on their particular circumstances.

The information herein is provided solely to educate on a variety of topics, including wealth

planning, tax considerations, estate, gift and philanthropic planning.

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Table of Contents

I. WHAT IS A TRADITIONAL GRANTOR RETAINED ANNUITY TRUST

(“GRAT”) AND WHAT IS THIS PAPER ALL ABOUT? .................................................... 1

A. What is a GRAT? ......................................................................................................... 1

B. Advantages of a Traditional GRAT ............................................................................. 2

C. Considerations of Using a Traditional GRAT ............................................................. 5

D. Some of the Goals of This Paper ................................................................................ 9

II. POSSIBLE STRUCTURAL SOLUTIONS TO ADDRESS CERTAIN

ADMINISTRATIVE AND CERTAIN STEWARDSHIP DISADVANTAGES OF A

TRADITIONAL GRAT ........................ 11

A. Structural Solutions to Prevent the Inadvertent Additional Contribution of

Assets to a GRAT ..................................................................................................... 11

B. Structural Solutions to Ensure That the Annuity Amount is Always Deemed to

Be Paid on a Timely Basis ........................................................................................ 11

C. Structural Solutions to Limit the Amount That is Received By the

Remainderman of the GRAT ..................................................................................... 11

D. Solutions to Reduce the Mortality Risk in GRATs ................................................... 12

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III. MARRYING THE BEST CHARACTERISTICS OF A DISCOUNTED SALE TO A

GRANTOR TRUST WITH A GRAT: THE ADVANTAGES AND

CONSIDERATIONS OF CONTRIBUTING AN INTEREST IN A LEVERAGED

FLLC TO A GRAT

A. What is the Technique?

B. Advantages of the Leveraged FLLC Asset GRAT Technique.

C. Considerations of the Technique

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IV. A LEGAL STRUCTURE THAT MAY ALWAYS ENSURE A SUCCESSFUL

GRAT: FUNDING A LEVERAGED FLLC ASSET GRAT WITH A

GUARANTEED PREFERRED PARTNERSHIP INTEREST AND FUNDING

ANOTHER LEVERAGED FLLC ASSET GRAT WITH SLIGHTLY DIFFERENT

BENEFICIARIES WITH A GROWTH PARTNERSHIP INTEREST .......... 44

A. The Technique ........................................................................................................... 44

B. Advantages ................................................................................................................ 45

1. This Legal Structure Works Extremely Well in All Markets ........................ 45

2. The Gift Tax Valuation Rules Under IRC Sec. 2701 Do Not Apply,

Because of the Exception for Guaranteed Return Preferred Interests ........... 48

3. This Technique Has the Same Advantages as the Leveraged FLLC Asset

GRAT Technique .......................................................................................... 49

C. Considerations ........................................................................................................... 49

1. There May Be Additional Income Tax Consequences if the Guaranteed

Preferred Interest is Not Owned By Grantor Trusts ...................................... 49

2. This Technique Has the Same Considerations as the Leveraged FLLC

Asset GRAT .................................................................................................. 49

3. The GRATs and the Remainder Trusts Should Have Different Provisions

in Order to Avoid the IRS Treating the Two GRATs as One GRAT

Under Equitable Tax Principles .................................................................... 49

V. POSSIBLE STRUCTURAL SOLUTIONS TO ALLOW THE ALLOCATION OF

THE GST EXEMPTION UPON THE CREATION OF A GRAT ....................................... 49

A. Introduction. .............................................................................................................. 49

B. If There is a 5% or Less Probability That Estate Tax Inclusion Will Occur

Because of the Death of the Grantor, is There an Exception to the ETIP Rules

Applying, Which Allows an Upfront Allocation of a GST Exemption? .................. 50

C. Is There a Technique That Uses the Leverage of the GRAT to Indirectly Profit a

GST Trust in Which a Skip Person is Not the Remainderman of the GRAT at the

Beginning or End of the ETIP (and Does the Technique Work)? ............................. 52

D. The Remainder Interest in a GRAT That is Indirectly Held By the Grantor of the

GRAT is Sold For Full and Adequate Consideration to an Old Exempt GST .......... 56

1. Advantages .................................................................................................... 56

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2. Considerations ............................................................................................... 57

E. The Creation of a GRAT For Full and Adequate Consideration. ............................. 58

1. The Technique ............................................................................................... 58

2. Constitutionally, There is Probably a Need For a Transfer Before GST

Tax Can Apply .............................................................................................. 60

VI. USING A 20% ANNUAL INCREASING ANNUITY GRAT, AND USING

“PROPORTIONALITY” AND “DEBT” EXCEPTIONS TO IRC SEC. 2701 TO

PLAN FOR PRIVATE EQUITY FUND MANAGERS AND HEDGE FUND

MANAGERS ........................................................................................................................ 65

A. The Technique ........................................................................................................... 65

B. Observations .............................................................................................................. 71

VII. LIFETIME CHARITABLE GIVING STRATEGIES THAT ALSO BENEFIT

CLIENT’S DESCENDANTS IF USED WITH A LEVERAGED FLLC ASSET

GRAT .................................................................................................................................... 71

A. Use of a Leveraged FLLC Asset GRAT When One of the Assets of the FLLC is

a Non-charitable Interest in a Charitable Remainder Unitrust (“CRUT”) ................ 71

1. Introduction and the Technique .................................................................... 71

2. Advantages of the Technique. ....................................................................... 75

3. Considerations of the Technique ................................................................... 79

B. Creating a FLP or FLLC with Preferred and Growth Interests, Transferring the

Preferred Interest to a Public Charity, and Transferring the Growth Interests to a

Leveraged FLLC Asset GRAT .................................................................................. 79

1. The Technique ............................................................................................... 79

2. Advantages of the Technique ........................................................................ 80

3. Considerations of the Technique ................................................................... 86

C. The Use of a High-Yield Preferred Partnership or Membership Interest With a

Charitable Lead Annuity Trust (“CLAT”) ................................................................ 90

1. The Technique ............................................................................................... 91

2. Advantages of the Technique ........................................................................ 92

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3. Considerations of the Technique ................................................................... 93

VIII. HOW THE LEVERAGED FLLC ASSET GRAT COULD FACILITATE FUTURE

TRANSFER TAX PLANNING, IF THE IRS ISSUES REGULATIONS UNDER IRC

SEC. 2704(b)(4) THAT ARE CONSISTENT WITH THE FEBRUARY 13, 2012

GREENBOOK PROPOSAL ................................................................................................. 96

A. The Possible Form of the IRS Regulations That May Be Issued Under IRC Sec.

2704(b)(4) ................................................................................................................. 96

B. The Taxpayer Must Demonstrate That a Regulation Under IRC Sec. 2704(b)(4)

is an Unreasonable and an Invalid Extension of IRC Sec. 2704(b)(4), Because it

is Manifestly Contrary to That Statute, in Order to Have That Regulation Ignored

in Transferring an Interest in a Closely Held Family Enterprise ............................... 99

C. Arguments That if the Treasury Regulations Under IRC Sec. 2704(b)(4) Take

the Form of the Greenbook Proposal, the Regulations Will Be an Unreasonable

and Invalid Extension of IRC Sec. 2704(b)(4) ........................................................ 102

1. If the Taxpayer Demonstrates That a New Regulation is Manifestly

Contrary to the Purpose of IRC Sec. 2704(b), a Court Will Invalidate the

Regulation, Despite Its Not Explicitly Contradicting the Statutory

Language. .................................................................................................... 102

2. Not Only Would Regulations Under IRC Sec. 2704(b)(4) That Take the

Form of the Greenbook Proposal Violate the Origin and Purpose of IRC

Sec. 2704(b), Those Regulations Would Also Be Manifestly Contrary to

the Language of IRC Sec. 2704(b)(4) ......................................................... 113

D. Even if Certain Restrictions Are Disregarded in an Organizational Document,

and Even if Other Provisions Are Substituted For the Disregarded Provisions,

the Valuation of Transferred Interests in a Family Holding Company May Not

Change, if the Courts Apply the Non-marketable Investment Company

Evaluation Method. ................................................................................................. 118

E. Because of the Uncertainty About the Enforceability of Regulations Under IRC

Sec. 2704(b)(4), and Even if the Regulations Are Held to Be Valid, the

Uncertainty of the Application of the Lack of Liquidity Valuation Discount, the

Taxpayer Should Consider Using the “Kerr” Strategy, or a Similar Strategy, to

Protect Against a Significant Gift Tax if the Courts Uphold the Regulations and

if the Courts Also Do Not Apply the Lack of Liquidity Discount .......................... 118

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PULLING THE RABBIT OUT OF THE GRAT HAT: SOME OF THE MOST

CREATIVE STRUCTURAL GRAT PLANNING IDEAS WE SEE OUT THERE©

I. WHAT IS A TRADITIONAL GRANTOR RETAINED ANNUITY TRUST (“GRAT”)

AND WHAT IS THIS PAPER ALL ABOUT?

A. What is a GRAT?

A GRAT is an irrevocable trust to which the grantor transfers an asset in exchange for the

right to receive a guaranteed annuity for a fixed number of fiscal years (the “Annuity Period”).1

When the trust term expires, any GRAT balance remaining is transferred tax free to a designated

remainder beneficiary (e.g., a “defective grantor trust” for the benefit of the grantor’s spouse and

issue).2 If a grantor makes a gift of property in trust to a member of the grantor’s family while

retaining an interest in such property, the taxable gift generally equals the fair market value of the

gifted property without reduction for the fair market value of the retained interest.3 However, IRC

Sec. 2702 provides that for a gift of the remainder of a GRAT in which the grantor retains a

“qualified interest,” defined to include a guaranteed annuity, the taxable gift will be reduced by

the present value of the qualified interest, as determined pursuant to a statutory rate determined

under IRC Sec. 7520(a)(2) (the “Statutory Rate”). In general, Statutory Rate requires an actuarial

valuation under prescribed tables using an interest rate equal to 120 percent of the Federal

midterm rate in effect for the month of the valuation.4

A grantor’s ability to determine the size of the guaranteed annuity and the annuity period

at the outset allows the GRAT to be constructed so that the present value of the grantor’s retained

interest approximately equals the value of the property placed in the GRAT, resulting in a “zeroed

1 The GRAT may also be structured to terminate on the earlier of a period of years or the grantor’s death, with a

reversion of the entire corpus to the grantor’s estate on premature death, but doing so will reduce the value of the

retained interest.

2 IRC Sec. 2702 provides the statutory authority for such transfers after October 8, 1990. IRC Sec. 2702(a)

uses the “subtraction- out” method to value retained interests of split-interests transfers. Under IRC Sec. 2702(b), a

qualified interest includes any interest that consists of a right to receive fixed amounts. The value of a remainder

interest in a GRAT that meets the requirements of IRC Sec. 2702 is computed by subtracting the present value of the

grantor’s annual annuity payments from the contributed properties’ current fair market value. The grantor must

recognize a taxable gift to the extent of any computed remainder interest. The present value of the grantor’s annual

annuity payment is computed by discount rates set by the IRS under IRC Sec. 7520. The IRS Tables change monthly

to reflect an interest rate assumption of 120% of the mid-term adjusted Federal Rate for that month under IRC Sec.

1274(d)(1).

3 See IRC Sec. 2702(a)(2)(A). Absent IRC Sec. 2702, the amount of the gift would be reduced by the value

of the retained interest.

4 See, IRC Sec. 7520(a)(2). Certain exceptions set forth in Treas. Reg. §25.7520-3(b) do not appear to be

applicable to the facts discussed in this paper. See Treas. Reg. §25.2511-1(e).

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out” GRAT.5 If the grantor survives the GRAT term and the GRAT earns a yield or otherwise

appreciates at a rate that exceeds the Statutory Rate, the amount of such excess value should pass

to the GRAT’s designated beneficiaries free of transfer tax.

B. Advantages of a Traditional GRAT.

1. Valuation Advantage of a GRAT.

Under the regulations, the grantor’s retained annuity rights may be defined in the trust

instrument as a percentage of the fair market value of the property contributed by the grantor to the

trust, as such value is finally determined for federal tax purposes. For example, the trust

5 The possibility of completely “zeroing out” a GRAT was negated by Example 9 of Treas. Reg.

§25.2702-3(e). Example 9 was invalidated by Walton v. Commissioner, 115 T.C. 589 (2000), acq., Notice 2003-72,

2003-44 I.R.B. 964. Final regulations reflecting Walton and containing a revised Example 9 were issued. T.D. 9181

(February 25, 2005), 70 F.R. 9,222-24 (February 25, 2005). Prior to its acquiescence, the IRS, in Revenue Procedure

2002-3, 2002-1 C.B. 117, Section 4.01(51), announced that it will not issue a favorable private letter ruling in

circumstances where the amount of the guaranteed annuity payable annually is more than 50 percent of the initial net

fair market value of the property transferred to the GRAT or if the present value of the remainder interest is less than

10 percent of the transferred property’s initial net fair market value. This item remains on the “no ruling” list. Rev.

Proc. 2015-3, 2015-1 I.R.B. 129, Section 4.01(53). The regulations do not include any such 50/10 limitation, nor

would such a limitation be consistent with the Walton case itself, which involved a zeroed-out GRAT.

The Obama Administration has proposed changes with respect to GRATs which would require that the

remainder have a minimum value. The ability to “zero out” (or almost zero out) the GRAT under current law

would be eliminated. See Treasury Department, “General Explanations of the Administration’s Fiscal Year 2016

Revenue Proposals” (February, 2015.) The proposal is described on pp. 197-198:

Reasons for Change

GRATs and sales to grantor trusts are used for transferring wealth while minimizing the gift and

income tax cost of transfers. In both cases, the greater the post-transaction appreciation, the greater the transfer

tax benefit achieved. The gift tax cost of a GRAT often is essentially eliminated by minimizing the term of the

GRAT (thus reducing the risk of the grantor’s death during the term), and by retaining an annuity interest

significant enough to reduce the gift tax value of the remainder interest to close to zero. In addition, with both

GRATs and sales to grantor trusts, future capital gains taxes can be avoided by the grantor’s purchase at fair

market value of the appreciated asset from the trust and the subsequent inclusion of that asset in the grantor’s

gross estate at death. Under current law, the basis in that asset is then adjusted (in this case, “stepped up”) to its

fair market value at the time of the grantor’s death, often at an estate tax cost that has been significantly reduced

or entirely eliminated by the grantor’s lifetime exclusion from estate tax.

Proposal

The proposal would require that a GRAT have a minimum term of ten years and a maximum term of the

life expectancy of the annuitant plus ten years to impose some downside risk in the use of a GRAT. The proposal

also would include a requirement that the remainder interest in the GRAT at the time the interest is created must

have a minimum value equal to the greater of 25 percent of the value of the assets contributed to the GRAT or

$500,000 (but not more than the value of the assets contributed). In addition, the proposal would prohibit any

decrease in the annuity during the GRAT term, and would prohibit the grantor from engaging in a tax-free

exchange of any asset held in the trust.

This proposal would apply to trusts created after the date of enactment.

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agreement might provide for payments of 53% per year for two years, where the 53% annual

payment amount is derived from the initial value. This type of language operates as a built-in

revaluation clause, mitigating the risk of a surprise gift on revaluation of the transferred property

by the Service. This feature can be especially beneficial with contributed assets of which

reasonable people (and unreasonable people) could differ as to the initial value (e.g., a private

derivative, closely held limited partnership interest, or closely held subchapter S corporation

stock).

This valuation advantage may be the most important advantage of the GRAT in

comparison to other estate planning techniques. The IRS is not going to argue their own

regulations are against public policy like they have with other defined value assignments. The

IRS served notice that they are taking dead aim with perhaps a regulations project against other

forms of defined value assignments.6 The disadvantages of a GRAT in comparison to other

techniques can all be eliminated or significantly mitigated is the primary thesis of this paper.

2. Ability of Grantor to Pay for Income Taxes Associated With GRAT Gift

Tax-free and Substitute Assets of the GRAT Income Tax-free.

A GRAT can be designed to be an effective trust for estate and gift tax purposes and

income tax purposes (i.e., a so-called grantor trust). That is, the trust will not pay its own income

taxes, rather the grantor of the trust will pay the income taxes associated with any taxable income

earned by the trust.

IRC Secs. 671 through 677 contain rules under which the grantor of a trust will be treated

as the owner of all or any portion of that trust, referred to as a “grantor trust.” If a grantor retains

certain powers over a trust, it will cause the trust to be treated as a grantor trust. If the grantor is

treated as the owner of any portion of a trust, IRC Sec. 671 provides that those items of income,

deductions, and credits against the tax of the trust that are attributable to that portion of the trust

are to be included in computing the taxable income and credits of the grantor to the extent that

such items will be taken into account in computing the taxable income or credits of an individual.

An item of income, deduction or credit included under IRC Sec. 671 in computing the taxable

income and credits of the grantor is treated as if received or paid directly to the grantor.7 Thus, if

the private investor contributes assets to an intentionally defective grantor trust, the assets will

grow (from the point of view of the trust beneficiaries) income-tax free. Furthermore, the IRS

now agrees that there is no additional gift tax liability, if the private investor continues to be

subject to income taxes on the trust assets and there is no right of reimbursement from the trust.8

Under Rev. Rul. 85-13,9 a grantor is treated as the owner of trust assets for federal income

tax purposes to the extent the grantor is treated as the owner of any portion of the trust under IRC

6 See Department of the Treasury July 31, 2015 2015-2016 Priority Guidance Plan (Page 14).

7 Treas. Reg. §1.671-2(c).

8 See Rev. Rul. 2004-64, 2004-2 C.B. 7 (July 1, 2004).

9 Rev. Rul. 85-13, 1985-1 CB 184.

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Sec. 671-77. In that ruling, it was held that a transfer of trust assets to the grantor in exchange for

the grantor’s unsecured promissory note is not recognized as a sale for federal income tax

purposes.10

Similarly, if the grantor is treated as the owner of the trust property and transfers property

into the trust in exchange for property previously held by the trust, such transfer will not be

recognized as a sale, exchange or disposition for federal income tax purposes.11 Thus, no gain or

loss is realized by the grantor or the trust. The basis of the property transferred into the trust is

unaffected by the transfer, and neither the grantor or the trust acquires a cost basis in the assets

transferred from or to the trust.

Thus, if the assets of the GRAT, any time during the term of the GRAT, have significant

appreciation, the grantor is in a position to substitute other assets to lock in the profit of the

GRAT. As a practical matter, the ability to substitute assets may be used by the grantor of a

GRAT to “lock in” appreciation in the investment of a GRAT prior to the end of the Annuity

Period by substituting other assets of equal value that are less likely to fluctuate, if at the time of

such substitution the yield or appreciation of the investments of a GRAT surpasses the Statutory

Rate. In this connection, Treas. Reg. §25.2702-3(b)(5) requires the governing instrument of a

GRAT to prohibit additional contributions to the GRAT after its inception. It might be argued

that the power to swap assets of equal value constitutes a power to make an additional

contribution. However, to date the Service has not made this connection. In addition, numerous

private letter rulings have approved GRATs containing a power of substitution without raising or

reserving as to this issue.12 Other considerations with respect to swapping assets with respect to

GRATs are addressed later in this paper.

3. Synergy With Other Techniques.

A GRAT may be a means to transfer enough wealth to a trust for the benefit of the next

generation in order to provide leverage for other future estate planning techniques. If the GRAT,

or GRATs, that a grantor and a grantor’s spouse create are successful (e.g. 10% of the family’s

wealth is transferred downstream to the grantor’s family or to trusts for the grantor’s family),

further leveraging with respect to other transfer tax planning techniques could occur. For

instance, assume that a GRAT or GRATs that are created by a grantor and a grantor’s spouse

transfer approximately 10% of the family’s net worth to a grantor trust for the benefit of their

family. The grantor and the grantor’s spouse could transfer their remaining assets to a trust in

exchange for a note that is equal to the fair market value of what has been transferred. In that

10 See also, PLR 9146025 (August 14, 1991) (finding that transfer of stock to grantor by trustees of grantor

trust in satisfaction of payments due grantor under the terms of the trust does not constitute a sale or exchange of the

stock).

11 See PLR 9010065 (December 13, 1989).

12 See, e.g., PLR 200220014 (Feb. 13, 2002); PLR 200030010 (Apr. 26, 2000); PLR 200001013 (idem,

200001015 (Sept. 30, 1999)); PLR 9519029 (Feb. 10, 1995); PLR 9451056 (Sept. 26, 1994); PLR 9352007 (Sept. 28,

1993); PLR 9352004 (Sept. 24, 1993); and PLR 9239015 (Jun. 25, 1992).

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fashion, the grantor has achieved a freeze of his or her estate (except for the interest carry on the

note) while paying no (or very little) gift tax. That trust could also purchase life insurance to equal

approximately 40% of the projected principal amount of the note due on the death of the surviving

spouse. In order to receive a step-up in basis of the underlying assets in the grantor trust the

taxpayer could enter into one of the techniques described in Section III B 3 C.

4. Comparatively Low Hurdle Rate.

From August, 2012 to August, 2015, the Statutory Rate has ranged between 1% and 2.2%.

In today’s relatively low interest rate environment for US Treasury obligations, it is certainly

possible, and for certain investments probable, that the investments of a GRAT will exceed that

hurdle rate.

5. High Leverage.

A GRAT can be created where the grantor retains an annuity amount that is almost equal

to the value of the assets there were originally placed in the GRAT. Stated differently, significant

leverage can be created by creating an annuity that is almost equal to the value of the assets placed

into the GRAT. As noted above, if there is appreciation above the Statutory Rate, the appreciation

above the Statutory Rate will accrue to the remainderman. In comparison, most practitioners

believe that other leveraged gifting techniques, including a sale to a grantor trust, should have

more equity associated with the transaction (e.g., for example, some practitioners advocate at least

10% equity with a sale to a grantor trust, which usually results in a taxable gift).

6. Non-recourse Risk to Remaindermen.

Another financial advantage of the GRAT technique is that if the asset goes down in value,

the remaindermen have no personal exposure. Furthermore, there is no added cost of wasting

significant gift tax exemptions of the grantor. For instance, assume for the sake of comparison,

that at the time of the sale to the grantor trust, the grantor trust had 10% - 15% equity. If the asset

goes down in value, that equity of the trust could be eliminated and the exemptions that were

originally used to create that equity could also be wasted.

C. Considerations of Using a Traditional GRAT.

1. Financial Reasons Why a GRAT May Not Succeed.

A famous University of Texas football coach, Darrell Royal, once explained why he

disdained the forward pass, “Three things can happen when you throw a pass and two of them are

bad.” To a certain extent the same thing can be said about investments that are placed in a GRAT.

If the investment goes down (the equivalent of a pass interception), or if an investment only

increased modestly (the equivalent of a pass incompletion), the GRAT will be unsuccessful in

transferring wealth to the remainderman. Thus, because of investment performance, many

GRATs may not be successful. Please see Sections III and IV of this paper for structural

techniques that allow a GRAT to work in flat or down markets.

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a. Some Assets Are Not Volatile.

Generally, assets that have a chance to have a significant result over the Annuity Period

have a wide variance of possible investment outcomes. A stable asset portfolio, while in another

context generally desirable, is not a desirable portfolio for a GRAT. If the leading objective of the

GRAT is to produce a transfer of wealth to the remainderman, variance of return (or risk) is a

friend, not an enemy. Thus, the challenge for the practitioner for clients that have a stable

portfolio of assets is how to make the GRAT an effective technique.

b. Some GRAT Investments Are Only Profitable if the Investment is

Long.

Another challenge for the practitioner in dealing with many clients’ normal asset portfolio

is that the assets are only profitable if the markets in which the assets are invested increase.

Markets do not always increase in value, nor do the assets which find much of their return related

to that market always increase in value. Thus, if the markets are flat, or if the markets are

decreasing in value, many of the GRATS created during that period will be unsuccessful.

2. If a GRAT is Not Administered Properly, the Retained Interest By the

Grantor May Not Be Deemed to Be a Qualified Interest.

a. The Atkinson Worry.

The U.S. Court of Appeals for the Eleventh Circuit (see Atkinson, 309 F.3rd

1290 (11th

Cir.

2002), cert denied, 540 U.S. 945 (2003)),13 has held that an inter vivos charitable remainder

annuity trust’s (CRAT’s) failure to comply with the required annual payment regulations during

the donor’s lifetime resulted in complete loss of the charitable deduction. The Court found that

the trust in question was not properly operated as a CRAT from its creation. Even though the

subject CRAT prohibited the offending acts of administration, the Court held that the CRAT fails.

In a similar fashion, the Internal Revenue Service could take the position that if the

regulations under IRC Sec. 2702 are violated by the trustee of the GRAT’s administrative

practices, then the interest retained by the grantor will not be a qualified interest. Just as in the

Atkinson case, it may not matter if appropriate savings language is in the document. As explored

below, there are many areas in which the administration of a GRAT may fail, including the

following: (i) not timely paying the annuity amount due to the grantor; (ii) inadvertently making

more than one contribution to the GRAT; (iii) inadvertently engaging in an activity (i.e., paying

the annuity with a hard to value asset) that would constitute an underpayment of the amount owed

to the grantor, which would constitute a deemed contribution; and/or (iv) inadvertently engaging

in an activity (i.e., paying the annuity with a hard to value asset) that would constitute an

acceleration of the amounts owed to the grantor (a commutation).

13 See also CCA 200628028 (July 14, 2006).

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b. The Annuity Amount Must Be Paid Annually.

An annuity amount payable based on the anniversary date of the creation of the trust must

be paid no later than 105 days after the anniversary date. An annuity amount payable based on the

taxable year of the trust may be paid after the close of the taxable year, provided that the payment

is made no later than the date on which the trustee is required to file the federal income tax return

of the trust for the taxable year (without regard to extensions).14 Failure to pay the annuity amount

within these time limits may jeopardize the retained interest by the grantor of the trust from being

a qualified interest. If a retained interest in the GRAT is not a qualified interest, then it will have

a value of zero for purposes of determining the gift tax associated with the grantor’s contribution

of assets to the trust.

Please see Section II B of this paper for structural techniques that eliminate this

consideration.

c. Paying the Grantor in Satisfaction of His Retained Annuity Interest

With Hard to Value Assets May Disqualify His Retained Interest

From Being a Qualified Interest, if the Assets Are Valued

Improperly.

In order to have a successful GRAT, it is obviously desirable to have an asset that has

significant potential for appreciation. It is desirable from a volatility and potential growth

standpoint to contribute, in many instances, a hard to value asset to the GRAT. Many of the asset

classes that have that potential for appreciation (e.g., closely held partnership interests, stock in

subchapter S corporations, real estate, hedge funds and other private equity investments) are very

difficult to value accurately.

The problem with a GRAT that owns hard to value volatile assets is that when it is time to

pay the retained annuity amounts to the grantor, it is often difficult to value the asset that is being

used to satisfy the annuity obligation. If the distributed asset is finally determined to have had too

low a value when it is used to satisfy the annuity amount owed by the GRAT, it could be deemed

to be an additional contribution by the annuitant to the GRAT, which is prohibited. See Treas.

Reg. §25.2702-3(b)(5). On the other hand, if it is finally determined that the hard to value asset

that is distributed in satisfaction of the annuity payment to the grantor had too high a value, it

could be determined by the IRS that such a payment is a commutation, which is also prohibited.

See Treas. Reg. §25.2702-3(d)(5). Thus, the trustee of the GRAT, which is frequently also the

grantor, must be very careful, like Goldilocks, to make sure that the annuity payments are “just

right”. Using hard to value assets, to make the “just right” payments, may be highly problematic.

Please see Section III of this paper for a structural technique that allows hard to value

assets to be contributed to a GRAT, yet does not use those assets to pay the GRAT annuity.

14

See Treas. Reg. §25.2702-3(b)(4).

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d. The Contribution of Assets to the Traditional GRAT Structure

Must Be Made At the Exact Point of the Creation of the GRAT.

As noted above, there cannot be any additional contributions to a GRAT. If an assignment

to a GRAT is not effective at the same time of assignment of another asset to a GRAT is made,

that could be finally determined to violate the prohibition against additional contributions to a

GRAT. That additional contribution could cause the retained interest in the GRAT by the grantor

to not be considered a qualified interest for purposes of IRC Sec. 2702.

Please see Section II A of this paper for structural techniques that should solve this

consideration.

3. The Retained Annuity Interest is Valued Using the Valuation Principles

Under IRC Sec. 7520, Which is Typically Higher Than Interest on an

Intra-Family Note.

One of the disadvantages of a GRAT in comparison to sales to intentionally defective

grantor trusts is that the qualified interest is valued under IRC Sec. 7520, which is inherently

higher than the AFR that may be used for notes received for sales to intentionally defective

grantor trusts.

Please see Section III of this paper for a structural technique that ameliorates this

consideration.

4. A Successful GRAT Could Regress to the Mean By the End of the Term of

the GRAT.

As noted above, one of the disadvantages of the GRAT is that it cannot be commuted. The

GRAT must last its designated term and the only permissible beneficiary of the GRAT during the

term of the GRAT is the holder of the annuity interest. Assume a grantor creates a three year

GRAT with a volatile stock in which there has been a significant increase in value by the end of

year two. If the stock then regresses to a lower price before the end of the third year of the GRAT,

less value will pass to the remainderman beneficiaries of the GRAT, than would have been the

case, if the GRAT could have been commuted in two years.

Please see Sections III and IV of this paper for structural techniques that ameliorate this

consideration.

5. The Traditional GRAT Structure May Not Satisfy a Client’s Stewardship

Goals Because the Investments of the GRAT May Have Been Too

Successful.

Many clients, in developing their future stewardship goals for their assets, have a view that

only a certain percentage of their assets should go to their descendants. If a GRAT is more

successful than a grantor anticipated, the possibility exists that the stewardship balance the client

wishes to maintain may be upset.

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Please see Section II C of this paper for a structural technique that eliminates this

consideration.

6. The GST Tax Exemption May Be Difficult to Leverage Through the Use of

a Traditional GRAT Structure.

It is difficult to leverage the GST exemption with a GRAT. It is generally thought that the

generation-skipping tax exemption of the grantor may not be leveraged, like the gift tax

exemption may be leveraged, through the use of a GRAT. This is because of the estate tax

inclusion period (“ETIP”) rule found in IRC Sec. 2642(f)(3), which provides as follows:

Any period after the transfer described in paragraph (1) during which the

value of the property involved in such transfer would be includible in the gross

estate of the transferor under Chapter 11 if he died. The transferor’s exemption for

generation-skipping tax purposes cannot be allocated until after the ETIP period.

Since a grantor is the only beneficiary of a GRAT during the Annuity Period, if the grantor

dies during that term a significant portion (usually all) of the assets of the GRAT will be included

in the grantor’s estate under IRC Sec. 2036. Only after the Annuity Period passes and it is clear

that the property will not be included in the grantor’s estate for estate tax purposes, may a

grantor’s GST exemption be allocated.

Please see Section V of this paper for structural techniques that may facilitate the efficient

use of a GRAT for generation-skipping planning.

7. A Traditional GRAT Structure Will Not Be Successful in Transferring

Assets if the Grantor Does Not Survive Until the End of the Term of the

GRAT.

If a grantor does not survive the Annuity Period a significant portion or all of the assets of

the GRAT will be included in the grantor’s estate. The amount of corpus of the GRAT that will be

included in the grantor’s estate is that amount that is necessary to yield the annuity payment to the

grantor without reducing or invading the principle of the GRAT. The annual annuity receivable

divided by the Sec. 7520 interest rate equals the amount includable under IRC Sec. 2036. See

Treas. Reg. §20.2036-1(c)(2) and Treas. Reg. §20.2036-1(c)(2)(iii), Example 2.

Please see Section II D of this paper for structural techniques that may eliminate or

substantially ameliorate this consideration.

D. Some of the Goals of This Paper.

There is no question that the GRAT is one of the most popular estate planning tools that

the practitioner utilizes. While it is a very popular estate planning tool, it is probably a fair

statement, as noted above, that it is not always an effective estate planning tool. Critical

administrative issues exist with a GRAT that can lead to its failure.

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The purpose of this paper is to offer the reader some suggested solutions, which should

ameliorate or eliminate the above concerns and make the GRAT a more effective estate planning

tool. This paper discusses some of the most creative structural techniques, financial leverage

techniques and financial engineering techniques we see out there that are integrated with the

GRAT estate planning technique. Many of the ideas suggested in this paper were borrowed or

inspired from the creative thinking of other practitioners15 and colleagues.16

In addition to discussing suggested solutions to the considerations of using a traditional

GRAT, this paper will discuss the synergy of designing structures to be used with a GRAT that

address the following additional goals:

1. Designing a GRAT structure to save transfer taxes and income taxes by using basis

enhancing strategies in the administration of the GRAT (please see Section III B

14 of this paper);

2. Designing a GRAT structure to work well for an art owner who wishes to possess

his art until his death (see Section III B 14 of this paper);

3. Designing a GRAT structure to be a better alternative to a QPRT for a personal

residence owner who wishes to use that property until his death (please see Section

III B 14 of this paper);

4. Designing a GRAT structure to simulate a sale to a grantor trust without the

considerations of a sale to a grantor trust (please see Section III of this paper);

5. Designing a GRAT structure to protect the taxpayer from any new regulations

under IRC Sec. 2704(b)(4) (please see Section VIII of this paper);

6. Designing a GRAT structure to facilitate charitable planning (please see Section

VII of this paper);

7. Designing a GRAT structure to be the last GRAT the grantor ever creates (i.e., a

legal structure eliminates the need for cascading GRATs) (please see Section III B

13 of this paper);

8. Designing a GRAT structure so that the grantor never runs out of money (see

Section III B 3 of this paper);

9. Designing a GRAT structure to work well for equity fund or hedge fund managers

and avoid IRC Sec. 2701 rules (please see Section VI of this paper);

15 All of us are indebted to the creative work of Mil Hatcher, Jonathan Blattmachr, Ellen Harrison, Carlyn

McCaffrey, Richard Dees, Jonathan Koslow, Richard Covey and Dan Hastings.

16 Special thanks to my Goldman Sachs colleagues, including Jeff Daly, Cliff Schlesinger, Karey Dye,

Melinda Kleehamer, Adam Clark, Michael Duffy, Cathy Bell and Jason Danziger.

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10. Designing a GRAT structure to allow the grantor to have investment control and

some distribution control over the GRAT assets when the GRAT terminates

(please see Section II B 4 of this paper); and

11. Designing a GRAT structure to own and pay for life insurance (please see Section

III C 1 of this paper).

II. POSSIBLE STRUCTURAL SOLUTIONS TO ADDRESS CERTAIN

ADMINISTRATIVE AND CERTAIN STEWARDSHIP DISADVANTAGES OF A

TRADITIONAL GRAT.

A. Structural Solutions to Prevent the Inadvertent Additional Contribution of Assets

to a GRAT.

1. When Creating the GRAT, the Grantor May Wish to Consider a Provision

That Prohibits Any Additional Contributions to the GRAT and if Any

Additional Contribution is Made, a New GRAT Must Be Created

Specifically to Hold That Contribution.

2. The Grantor of the GRAT May Wish to Consider Initially Making the

Trust Revocable. Once All Assignments to the Trust Have Been

Completed, the Grantor Could Amend the Trust to Make it an Irrevocable

GRAT.

B. Structural Solutions to Ensure That the Annuity Amount is Always Deemed to Be

Paid on a Timely Basis.

The grantor of the GRAT may wish to consider a provision in the trust document that

provides (pursuant to a formula) a portion of the trust that is equal to the Annuity Amount due to

the grantor shall not be subject to the trust. If that portion remains in the hands of the trustee after

the annuity payment date, the trustee shall hold such property only as a nominee, or as an agent,

for the grantor. The grantor may also wish to consider a provision in the trust document that the

portion of the trust estate that is being held in that agent capacity can be comingled with the trust

assets and that the person also serving as trustee has full authority, as agent, to invest the property.

C. Structural Solutions to Limit the Amount That is Received By the Remainderman

of the GRAT.

Generally, it is advantageous for the grantor to put as much as he or she can afford into a

GRAT because that increases the likelihood of the remainderman beneficiaries receiving assets

when the GRAT terminates. For instance, assume a client holds an interest in a closely held

company. The client believes that within the next few years there could be a monetary event with

respect to his stock in the company either through a public offering or a merger. However, assume

the client’s stewardship goal is that, by the time of his death, a certain dollar amount will pass to

trusts for the benefit of his descendants with the rest of his estate passing to his favorite charitable

causes. Under those circumstances, the more stock the client contributes to a GRAT, the greater

the chance is that there will be sufficient assets as the end of the term of the GRAT to at least equal

SSE01WM -12-

stewardship goal he has for his descendants. The inherent conflict with that strategy is that the

more stock of the closely held company that he puts into the GRAT the greater the chance that the

remainder amount will exceed the stewardship goal that he has for his descendants.

A structural solution for a donor with those stewardship goals is to put a cap on the amount

left in the trust for the benefit of his descendants at the end of the annuity term. To the extent that

the value of the assets of the GRAT on its termination exceeds that cap, there could be a provision

that requires that excess to revert back to the donor. In that manner, the client could be

encouraged to contribute most, if not all, of his stock in the closely held business to the GRAT,

which helps ensure that the GRAT will be successful in reaching his stewardship goal for his

descendants, without the disadvantage of harming his charitable stewardship goals.

D. Solutions to Reduce the Mortality Risk in GRATs.

1. The Grantor Could Sell Her Retained Annuity Interest.

If the sale is made to a grantor trust or to a spouse, the sale will not have any income tax

consequences. Although the transfer of a retained interest that would otherwise cause inclusion

under IRC Sec. 2036 is presumptively subject to the three-year rule of IRC Sec. 2035(a), a sale for

full and adequate consideration is exempt under IRC Sec. 2035(d). The IRS could characterize

consideration equal to the remaining value of the annuity as not full and adequate for purposes of

IRC Sec. 2035 under the doctrine of United States v. Allen, 293 F.2d 916 (10th

Cir. 1961). The

viability of Allen may be questioned in light of the cases discussed below in Section V E 1 of this

paper. Even if the sale is not for full and adequate consideration, if the grantor lives at least three

years after the sale, IRC Sec. 2036 inclusion should be avoided.

2. The Grantor Could Use a Life Insurance to Hedge Against an Early Grantor

Death.

Please see the discussion in Section III C 1 of this paper.

3. The Grantor Could Purchase the Remainder Interest in a Profitable GRAT

From the Remainder Beneficiaries.

If before the end of the term of the GRAT, the GRAT is very profitable and the grantor

wishes to lock in the gain and the mortality risk of the grantor, the grantor could purchase the

remainder interest. If the remainder beneficiary is a grantor trust there will not be any income tax

consequences triggered by the purchase. The proceeds of the purchase will be removed from the

grantor’s estate. The IRS could characterize such a purchase as a commutation, as it did for QTIP

trusts in Rev. Rul. 98-8, 1998-1 C.B. 541. However, the policy underlying that ruling (to avoid an

“end run” around IRC Sec. 2519) does not apply to a GRAT. In order to preserve this opportunity

the GRAT trust document must not contain traditional spendthrift clauses and must permit a

transfer of interests in the GRAT.

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4. The GRAT Could Be Created By the Grantor in Consideration of Full and

Adequate Consideration.

If the remainder interest of a GRAT is not created by gift, but is created for full

consideration, IRC Sec. 2036 should not apply to the GRAT assets, if the grantor dies before the

end of the term of the trust. Please see the discussion in Section V D and V E of this paper.

5. In Order to Keep the GRAT Annuity Amount Very Low, the Donor Could

Use a Combination of the Following Strategies: A Member Interest in a

Leveraged Family Limited Liability Company (“FLLC”) Could Be

Contributed to the GRAT and the Donor Could Allocate Part or All of His

Gift Tax Exemption to the GRAT and Reduce the Retained Annuity.

If a grantor dies before the end of the term of the GRAT all that will be brought back into

his estate is the annuity amount divided by the then IRC Sec. 7520 rate. If the annuity amount is

small, very little may be brought back into the grantor’s estate under IRC. Sec. 2036. Please see

the discussion in Section III of this paper.

III. MARRYING THE BEST CHARACTERISTICS OF A DISCOUNTED SALE TO A

GRANTOR TRUST WITH A GRAT: THE ADVANTAGES AND CONSIDERATIONS

OF CONTRIBUTING AN INTEREST IN A LEVERAGED FLLC TO A GRAT.

A. What is the Technique?

All wealthy taxpayers should consider an estate freeze estate planning technique that does

not use any of their unified credit, even those taxpayers who have low basis assets. In all states,

the marginal transfer tax rate is higher than the marginal federal and state capital gains rate. Thus,

removing future growth of a taxpayer’s assets, while preserving the taxpayer’s unified credit to be

used at the taxpayer’s death, always results in lower net transfer and capital gains taxes, even for

zero basis assets that are not sold during the taxpayer’s lifetime.

Perhaps the best freeze technique that does not have to use any of a taxpayer’s unified

credit is described below. In addition to preserving the unified credit in order to receive the

maximum step up without estate taxes, varieties of the technique described below also have the

potential of saving capital gains taxes beyond the estate freeze. See Section III B 3 c.

A taxpayer could create a single member FLLC by contributing and selling financial and

private equity assets to that FLLC. If the taxpayer is the only owner of the FLLC there should not

be any income taxes or gift taxes associated with the creation of the FLLC.17 The taxpayer could

then contribute some or all of the FLLC member interests to a GRAT. After the term of the

17 For the proposition that there should not be any income taxes because the sale of assets to a single member

FLLC is ignored for income tax purposes, see Treas. Reg. §301.7701-3(b)(1)(ii). For the proposition that there should

not be any gift taxes for a sale of assets for less than the value of the assets on creation of the leveraged single member

FLLC, please see Estate of Albert Strangi v. Commissioner, 115 T.C. 35 (2000).

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GRAT, the remainder beneficiary could be a grantor trust that names the grantor’s spouse as a

beneficiary and gives that spouse a special power of appointment. The technique will sometimes

be described below as the “Leveraged FLLC Asset GRAT.”

Consider the following example:

Example 1: Contribution of a Leveraged FLLC Member Interest to a GRAT

Neal Navigator approaches his attorney, Lenny Leverage, and tells him that he would like

to transfer, through the use of a GRAT, the maximum amount that he can transfer using a

three-year GRAT that will terminate in favor of a grantor trust for his wife and children. Neal

tells Lenny that he has around $25,000,000 in financial and private equity assets. Neal is willing

to have a significant portion of his assets subject to a three-year GRAT.

Lenny likes many of the aspects of a GRAT, including its built-in revaluation clause.

Lenny also likes using family limited partnerships (“FLPs”), or FLLCs, because of the

substantive non-tax investment and transfer tax advantages that are sometimes associated with

these entities (e.g., they may effectively deal with qualified purchasers and accredited investor

requirements for alternative investments and because of the possibility of valuation discounts).18

Despite the advantages of GRATs and the possibility of valuation discounts of FLPs and

FLLC’s, Lenny feels that there are certain disadvantages with contributing FLP interests and

FLLC member interests to a GRAT in comparison to a sale of partnership interests to a grantor

trust, including the disadvantage of the higher Statutory Rate and the potential difficulties in

paying the retained annuity amounts in a GRAT with hard to value FLP or FLLC interests. Lenny

proposes a way to eliminate those disadvantages.

Lenny recommends that Neal contribute $18,000,000 of marketable securities to a FLP.

Lenny assumes Neal’s limited partnership interest in FLP will have a 35% valuation discount.

Neal would then transfer the 99% limited partnership interest in FLP, together with $5,000,000

of alternative investments and $2,000,000 cash, to a single member FLLC (or “Holdco”) in a

part sale/part contribution, receiving a note equal to $16,724,700 (which is 90% of the assumed

value of the assets transferred to Holdco). Lennie assumes that Neal’s non-managing member

interest in Holdco will have a 20% valuation discount.

below:

Lenny’s proposed technique, assuming the IRC Sec. 7520 rate is 2.2%, is illustrated

18 See the discussion by this author in “Some of the Best Family Limited Partnership Planning Ideas We See

Out There,” ALI-ABA Planning For Large Estates, at 2-32 (Nov. 15, 2010).

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The technique described above is designed to join a discounted sale to a grantor trust to a

near “zeroed out” GRAT so as to get the best of both worlds.

Instead of this transaction, Neal could create Holdco, FLLC without leverage and transfer

his non-managing member interest in Holdco to a grantor trust for his spouse and descendants,

taking back a note at the appropriate AFR with a principal amount equal to the discounted value of

the transferred interest. In addition, cash or other assets with a value equal to 10% of the total

transfer could be gifted to the trust. (Alternatively, the Holdco interest could be sold to the trust

for 90% of its discounted value, with no additional gift.) The note could be structured so as not to

require interest and principal payments in the near term of more than the trust’s cash flow. The

sale will not result in realization of gain because transactions between a grantor and a grantor trust

are disregarded. See the discussion in Section III B 2. The underlying assets have a value in

excess of the note equal to the “discount amount” resulting from the discounts for FLP and

Holdco, which will be indirectly transferred to the Navigator family.

One aspect of the sale is the requirement that the purchasing trust have sufficient capital in

excess of the amount of the note to justify treating the note as debt with a value equal to its face

amount. A 10% cushion is widely believed to be the minimum adequate amount. In the

technique, the discount amount would actually exceed the required cushion, but it is not clear that

reliance on the underlying value that is not reflected in gift tax value would be regarded as

sufficient, nor would this be good “optics.” A bargain sale for 90% of value, or a separate gift,

would create a 10% cushion, but each result in a taxable gift.

A key disadvantage of this approach is that the assets that are sold or given could be

revalued. The IRS might argue for a lower discount in valuing the sold or given assets. A simple

price adjustment clause that would increase the sale price to cover the increased value will not be

SSE01WM -16-

recognized for gift tax purposes. A defined value transfer that shifts value in excess of the sale

price to a marital or charitable disposition might succeed in avoiding a taxable gift but at the cost

of diverting property away from the grantor trust, and while this has appellate case law support,

there remains legal uncertainty about the success of the technique (the IRS has not acquiesced to

the technique). A defined value transfer that reduces the quantum of property transferred to match

the sale price has received some case law support, but cannot yet be called a proven technique (the

IRS has not acquiesced to the technique), and it too would reduce the property passing to the

grantor trust by keeping it with the grantor.

If the note were not treated as debt, because of too much leverage, or for some other

reason, then it may be treated as a retained interest in the trust under equitable tax principles,

potentially resulting in a taxable gift under IRC Sec. 2702 and inclusion under IRC Sec. 2036.

Please see the discussion in Section B 12 of this paper. As we shall see, the Leveraged FLLC

Asset GRAT finesses the debt issue (both as to adequacy of the cushion and as to the result of the

note not being treated as debt under equitable principles) by making the sale to a single member

FLLC prior to any transfer to the GRAT.

Alternatively, Neal could create Holdco, FLLC without leverage and contribute his non-

managing member interest in Holdco to a GRAT. The discounted value of the transfer to the

GRAT would be $14,717,736. For a three-year trust and an IRC Sec. 7520 rate of 2.2%, the

annuity to zero out the transfer would be $5,123,310. The GRAT in theory solves the problem of

getting the discounts generated by FLP and Holdco through the system without making an initial

taxable gift. But will this be the case in the real world? The GRAT has no asset other than the

Holdco interest. If “slices” of the Holdco interest are used to pay the annuity, the interests

distributed must be valued using the valuation discount. Although the distributed slices of the

Holdco interest must be valued at a discount, they carry with them the corresponding “full” value

of the underlying assets, and nearly the entire Holdco interest must be distributed to satisfy the

annuity. The discount amount does not pass to the donees (though some value may remain as a

result of earnings on the discount amount). This problem would be solved if the GRAT could

distribute cash in satisfaction of the annuity, but Holdco has only $2 million of cash, plus cash

earnings during the GRAT term. Furthermore, the more cash that is distributed from Holdco, the

lower the valuation discount will be; which in turn increases the amount of the GRAT annuity that

must be paid.

Another approach would be for the GRAT to borrow the amount necessary to pay the

annuity in cash from a third party. At the end of the GRAT term, the remainderman would receive

the Holdco interest without diminution, and would assume the requirement to eventually repay

the note. As long as the remainderman is a grantor trust, the assumption of the note should not be

a realization event as to Neal or the GRAT. This approach in effect turns the GRAT into a

Leveraged FLLC Asset GRAT. Borrowing from a third party results in interest on the loan

passing outside the family. The “third party” could, however, be Neal’s spouse or an existing

family trust, although taxable interest income to the lender would result.

In summary, unlike the sale to a grantor trust, the contribution of an interest in a

non-leveraged entity to a GRAT offers certain protection from an inadvertent taxable gift upon

revaluation, but presents the problem of where to get the cash to pay the GRAT’s immediate

SSE01WM -17-

annuity obligation, a problem not present with the sale to a grantor trust, where payment of

principal and (if need be) interest on the note can be deferred.

The simplest way to “marry” a discounted sale and a GRAT would be to sell assets that

could be discounted to the GRAT. Under the facts of this example, the assets transferred to

Holdco could instead be sold to the GRAT (itself a grantor trust) for a note with a principal

amount equal to 90% of their value, or $16,724,700. The gross taxable gift is $1,858,300. The

GRAT annuity would be based on this reduced value. Instead of an annuity of $5,123,310 as in

the unleveraged GRAT discussed above, the annuity would be $646,883. The total annuity

payments over three years would have a present value of $1,858,300. The annuity payments could

be satisfied using the $2,000,000 cash transferred to the GRAT. Even if there were no cash

transferred, a 4% annual cash distribution from the assets would be $743,320, almost enough to

cover the annuity and a 0.32% note. The leverage reduces the annuity while protecting from gift

tax assets of sufficient magnitude to generate cash sufficient to pay the reduced annuity (or a good

portion of it). The annual annuity amount could be further reduced by lengthening the term of the

GRAT, until it was covered by the assets’ projected cash flow. Thus, even if the GRAT assets

earned only at the 7520 rate, the discount amount would be protected and would pass to the

grantor trust that is the GRAT remainderman. Of course, the interest and principal on the note

must be paid, but that is a longer-term issue.

One problem with this simple marriage is that the same 10% of the transferred value is

both the cushion for the note, and the amount subject to the GRAT annuity. It could be argued

that because that 10% will be consumed by the GRAT annuity, there really is no cushion. That

may lead to the finding that the note has more characteristics of a retained interest in the trust than

a note. If the note is not treated as debt under equitable tax principles, then the note may represent

an interest in the trust that is not a qualified annuity under IRC Sec. 2702, resulting in a taxable

gift.19 It could be argued that the discount amount itself provides a sufficient cushion for the note,

but as noted above, it is uncertain whether one can rely for the cushion on value that does not

“exist” in determining the value transferred. The only sure solution would be to have a 10% gift

taxable component in the transfer that is not offset by the annuity, which Neal wants to avoid.

Any such taxable gift would also increase proportionally if the discount were reduced on audit.

Another problem with this technique is that if the sale price is inadequate the sale could be

deemed to be a deemed contribution. This consideration may be eliminated if the sale is first to a

revocable trust. The revocable trust could, at a later time, be amended and become an irrevocable

GRAT.

Beyond the cushion issue, the simple marriage of a discounted sale and a GRAT has not

been approved in any case or ruling and many practitioners would be reluctant to be the test case

of such a novel format.

19

In itself, this might not disqualify the annuity as a “qualified interest,” though the IRS would probably

argue that one or another of the requirements of Treas. Reg. §25.2702-3(d) had been violated.

SSE01WM -18-

The Leveraged FLLC Asset GRAT technique seeks to avoid the problems of the simple

marriage by making the sale of the assets to an intermediate entity, a FLLC with a 1% managing

member interest and a 99% non-managing member interest, and then transferring the 99%

non-managing member interest in FLLC to the GRAT.

A side benefit of using the intermediate entity FLLC in the above illustration is the

additional discount provided by FLLC. The illustration assumes that FLLC would afford an

additional discount of 20% on top of the 35% discount afforded by FLP, so that the marketable

securities indirectly held in FLLC would have a cumulative discount of 48%. The extra discount

affords a benefit but is not the primary reason for using the second entity.

The limited partnership interest in this example, together with the alternative interests and

cash, are transferred to FLLC in exchange for a note with a principal amount equal to 90% of the

value of the transferred assets. The bargain sale leaves a 10% cushion in support of the note. If

the note’s validity as debt is tested at the moment of this transfer, it passes the cushion test and

presumably is valid debt.20

Even assuming under tax equitable principles part or all of the purported debt from the

FLLC is considered equity in the FLLC for tax purposes, the consequences that determination

may not be as disastrous as they would be for part or all of a note being considered a retained

trust interest in a sale to a grantor trust. That equity interest belongs to Neal, but it is an interest

in FLLC, not a direct retained interest in the GRAT. The application of equitable tax principles to

treat a retained note as FLLC equity will not be treated as an interest in a trust that is a

non-qualified interest under IRC Sec. 2702.

B. Advantages of the Leveraged FLLC Asset GRAT Technique.

1. If Leverage is Used in Creating the FLLC That is Contributed to the

GRAT, Much More Wealth Will Be Transferred to the Remainderman of

the GRAT Than Contributing Assets That Are Not Entities to a GRAT or a

FLLC That is Contributed to the GRAT Without Leverage.

In comparing the Leveraged FLLC Asset GRAT to a GRAT that uses discounted entities,

but does not use leverage, and to a GRAT that does not use either discounted entities or leverage,

under the above assumptions, the transfer tax advantage of the Leveraged FLLC Asset GRAT is

significant. The charts below summarize the advantage. The calculations below are made after

two years, ignoring valuation discounts, and are net of the outstanding debt. The assumed IRC

Sec. 7520 rate is 2.2%. The tables below assume different rates of returns, as noted (also see

Schedule 1 attached).

20 Of course, at the moment of sale nothing turns on whether the note is debt or an interest in FLLC, since

Neal already owns all the interest in FLLC. Only on the subsequent transfer to the GRAT does it become important

that the note be treated as debt to avoid a possible taxable gift and potential inclusion (but see the discussion below of

the consequences of “flunking” the debt test).

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Table 1a

Table 1b

Table 1c

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Under all rates of return, the Leveraged FLLC Asset GRAT substantially outperforms the

other techniques. The reason for the improved performance with the contribution of member

interests in a leveraged FLLC is (i) the average hurdle rate is lower with leverage and (ii) the

GRAT annuity amount is paid with the normal distributable cash flow of the FLLC instead of

discounted FLLC member interests. The chief reason for the outperformance is the second

reason. A significant arbitrage is created when a heavily discounted asset is contributed to a

GRAT and undiscounted cash is used to pay the annuity.

As noted below, not only does paying the GRAT annuity with cash, instead of discounted

entity interests, produce a much better transfer tax result, it does not present “deemed

contribution” or “deemed commutation” concerns that could accrue if hard to value assets are

used to pay the GRAT annuity.

2. The Leveraged FLLC Asset GRAT Technique Has Many of the Same

Advantages as the Sale to the Grantor Trust.

IRC Secs. 671 through 677 contain rules under which the grantor of a trust will be treated

as the owner of all or any portion of that trust, referred to as a “grantor trust.” If a grantor retains

certain powers over a trust, it will cause the trust to be treated as a grantor trust. If the grantor is

treated as the owner of any portion of a trust, IRC Sec. 671 provides that those items of income,

deductions, and credits against the tax of the trust that are attributable to that portion of the trust

are to be included in computing the taxable income and credits of the grantor to the extent that

such items will be taken into account in computing the taxable income or credits of an individual.

An item of income, deduction or credit included under IRC Sec. 671 in computing the taxable

income and credits of the grantor is treated as if received or paid directly to the grantor.21 Thus, if

the private investor contributes assets to an intentionally defective grantor trust, the assets will

grow (from the point of view of the trust beneficiaries) income-tax free. Furthermore, the IRS

now agrees that there is no additional gift tax liability, if the private investor continues to be

subject to income taxes on the trust assets and there is no right of reimbursement from the trust.22

It is possible to design a grantor trust, or a single member FLLC, that is defective for

income tax purposes (e.g., a retained power to substitute assets of the trust for assets of equivalent

value), but is not defective for transfer tax purposes. In comparison to either discounting or

freezing a client’s net worth, over periods of 20 years or more, the effect of paying the income

taxes of a grantor trust is generally the most effective wealth transfer technique there is.

Assuming there is appreciation of the FLLC assets above the interest carry on any note, the

appreciation will not be subject to estate taxes in either the grantor’s estate or the grantor spouse’s

estate. This is a significant transfer tax advantage. According to our calculations, where joint life

expectancies exceed 20 years, this is the second biggest driver of transfer tax savings for a client’s

family. (The most important driver for saving transfer taxes, over a 20-year period, as mentioned

21

Treas. Reg. §1.671-2(c).

22 See Rev. Rul. 2004-64, 2004-2 C.B. 7.

SSE01WM -21-

above, is the donor paying the income taxes of the trust on a gift tax-free basis.) The interest on

the note does not have to be any higher than the applicable federal rate in order to ensure there are

no gift tax consequences. See IRC Sec. 7872. The applicable federal rate, depending upon the

length of the term of the note is equal to the average Treasury securities for that term. See IRC

Secs. 7872 and 1274(d).

If the grantor cannot afford to pay the remainder trust’s income taxes in the future, the trust

could be converted to a complex trust that pays its own income taxes. However, converting the

trust to a complex trust could have income tax consequences if the then principal balance of the

note is greater than the basis of the assets that were originally sold to the FLLC. That difference

will be subject to capital gains taxes.23

3. The Leveraged FLLC Asset GRAT Technique Can Be Designed to Be

Very Flexible to Meet a Taxpayer’s Changing Consumption Needs or

Stewardship Goals, and Has Inherent Flexibility to Enter Into Basis

Enhancing Strategies.

a. Flexibility to Meet Changing Needs and Stewardship Goals By

Adding a Spouse as a Beneficiary of the Trust That is a Remainder

of the GRAT and Giving That Spouse a Special Power of

Appointment.

Generally, many of the same flexibility advantages of a sale to a grantor trust benefiting a

grantor’s spouse and family also exist with the Leveraged FLLC Asset GRAT technique in which

the remainderman of the GRAT is a trust for the transferor’s spouse and family. The GRAT and

the remainder trust of the GRAT can be designed to be a grantor trust in which the grantor is

responsible for paying the income taxes of the trust. The remainder trust may have features that

give the transferor’s spouse flexibility with consumption issues and stewardship issues. The

transferor also has retained leverage and flexibility by owning the note from the FLLC. There is

an inherent delay (i.e., the term of the GRAT) before the transferor’s spouse can enjoy the benefits

of any properties that may accrue to the trust for his or her benefit. This is ameliorated by the

transferor being entitled to the distributions of the FLLC either in the form of interest and

principal payments by the FLLC on the outstanding note, or in the form of annuity payments by

the GRAT.

It is possible for the patriarch or matriarch to name his or her spouse as a beneficiary of the

remainder trust and also give that spouse the power to redirect trust assets that are different than

the default provisions of the trust instrument. IRC Sec. 2041 provides that a person may be a

beneficiary of a trust and have a power of appointment over the trust as long as the beneficiary

does not have the right to enjoy the benefits of the trust under a standard that is not ascertainable

and does not have the power to appoint the trust assets to either the beneficiary’s estate or

23 See Treas. Reg. §1.1001-2(e), Ex. 5; Madorin v. Commissioner, 84 T.C. 667 (1985); Rev. Rul. 77-402,

1977-2 C.B. 722.

SSE01WM -22-

creditors of the beneficiary’s estate. If an independent third party is trustee of the trust, that third

party could have significant additional powers over the trust to distribute assets of the trust for the

benefit of that spouse. If the spouse is serving as trustee and has distribution powers in that

capacity, the distribution powers must be ascertainable and enforceable by a court within the

health, education, maintenance standard of IRC Sec. 2041.

If unanticipated consumption problems accrue during a couple’s lifetime and if the trust

allows distributions to be made to meet those unanticipated consumption needs, that trust can

obviously act as a safety valve for those needs. If the trust allows the grantor’s spouse to appoint

properties on his or her death in a manner different than the default provisions of the trust, those

powers of appointment could also serve as a safety valve to redirect the properties of the trust in a

way that is more consistent with the client’s future stewardship goals.

A collateral benefit of the inherent flexibility of creating trusts that have the safety valve of

having a client’s spouse as the beneficiary, and giving that spouse a limited special power of

appointment, is that the technique encourages the client to create such a trust when the client may

be reluctant to do so.

b. There is Inherent Flexibility to Meet Changing Consumption Needs

With the Grantor Retaining a Note From the FLLC That Could Be

Converted to a Note With a Different Interest Rate or a Private

Annuity.

The note retained by the grantor could also be structured and/or converted to meet the

grantor’s consumption needs, without additional gift taxes, as long as the restructuring is for

adequate and full consideration.

For instance, the note at a future time could be converted to a private annuity to last the

grantor’s lifetime. That conversion should be on an income tax free basis since, as noted above,

the trust and any consideration received for any sale to the trust are ignored for income tax

purposes. At the time of the conversion to a private annuity it is important that enough assets exist

in the FLLC to satisfy IRC Sec. 7520 exhaustion test requirements.

The note could also be restructured to pay a different interest rate, as long as the new rate is

not lower than the AFR rate or higher than the fair market value rate.

c. There is an Inherent Flexibility to Enter Into Basis Enhancing

Strategies With the Leveraged FLLC Asset GRAT.

The use of this technique freezes the taxpayer’s assets on a discounted basis. In other

words, the appreciation of the assets, similar to a sale of a discounted asset to a grantor trust, is not

subject to the taxpayer’s future estate taxes. Unlike a sale to a grantor trust that is created by

substantial use of a taxpayer’s available unified credit, the technique does not require the use of

the taxpayer’s unified credit. Any unified credit that can be saved by using this technique may be

used by the taxpayer to save estate taxes and capital gains taxes on the low basis assets owned by

the taxpayer at his death. Thus, this may be an ideal technique for a taxpayer who wishes to

SSE01WM -23-

preserve his unified credit to save estate taxes and capital gains taxes on certain low basis assets

he may own at the time of his death.

The principal and interest of the retained note may be paid with either cash or in kind.

There will not be any income tax consequences with in kind payments, if the FLLC remains a

disregarded entity. If low basis assets owned by the FLLC are used to make some of those in kind

payments, and if those low basis assets are retained by the grantor until the grantor’s death, there

will be a step-up in basis of those assets on the grantor’s death under IRC Sec. 1014.

The creator of the FLLC, as long as it is a disregarded entity, could swap his individually

owned high basis assets with the FLLC’s low basis assets. The creator of the FLLC could also buy

the low basis assets from the FLLC for a note. However, if the note is paid back after the creator’s

death there may be capital gains consequences to the then owners of the FLLC. The FLLC’s basis

in the note may be equal to the basis of the low basis assets that are purchased.

A better course of action for the creator of the FLLC who does not have any high basis

assets, may be to borrow cash from a third party lender to make that exchange. At a later time the

creator could refinance the note to the third party lender by borrowing cash from the FLLC.

Generally, Neal’s estate taxes will not increase with this basis enhancing technique because the

acquisition of low basis assets, which will be taxable in Neal’s estate, are offset by the note owed

either to third party lender or, at a later time, to the FLLC.

Consider the following illustrated example:

Hypothetical Transaction #1:

Neal Navigator borrows cash from Third Party Bank and uses that cash to purchase low

basis assets from Holdco FLLC, which is 99% owned by a grantor trust. Neal will be personally

liable on the bank loan. Holdco FLLC could guarantee the bank’s loan to Neal.

Hypothetical Transaction #1 is illustrated below:

SSE01WM -24-

Hypothetical Transaction #2:

Neal Navigator could continue to borrow from Third Party Bank. Or, in a few years,

because he would like the flexibility of a recourse, unsecured long-term note, or because interest

rates have moved, or because of some other financial reason, he could borrow cash from Holdco

FLLC to extinguish the Third Party Bank note.

The recourse, unsecured long-term note with Holdco FLLC will be at a fair market

interest rate that is much higher than the AFR. Neal will be personally liable on the note owed to

Holdco FLLC.

loaned.

Holdco FLLC’s basis in the new recourse, unsecured note may be equal to the cash that is

Hypothetical Transaction #2 is illustrated below:

Hypothetical Transaction #3:

Upon the death of Neal Navigator, the estate satisfies the note to Holdco FLLC with the

now high basis assets or cash (if the high basis assets are sold after the death of Neal Navigator).

Hypothetical Transaction #3 is illustrated below:

SSE01WM -25-

Another basis enhancing strategy opportunity with the Leveraged FLLC Asset GRAT

technique is to convert part or all of the retained note at some point to a preferred member interest

in the FLLC. The preferred interest, in order to avoid gift tax issues, needs to be compliant with

IRC Sec. 2701 and Revenue Ruling 83-120.24 In this example, assets with an underlying value of

approximately $25,000,000 were contributed to the single member FLLC. Assume in this

example that Neal Navigator and his wife, Nancy, need annual cash flow equal to $600,000 a year

for their consumption needs. Assume in a future year that the retained note has been reduced from

$16,724,700 to $12,000,000. Neal could convert $10,000,000 of the $12,000,000 note to a

$10,000,000 preferred non-managing member interest that pays a 6% annual coupon without any

income taxes associated with the conversion because the FLLC is a disregarded entity for income

tax purposes. The principal of the preferred could be designed to annually increase at the same

rate the exemption increases. In this manner, assuming Neal and Nancy have not used any of their

exemption in this technique, or any other technique, they will be in a position to eliminate the

estate tax. The $2,000,000 in retained notes that are not converted to a preferred interest could be

used to pay income taxes associated with the FLLC investments. At some point, distributions

from the remainder grantor trust could also be made to Nancy to also pay for Neal and Nancy’s

income taxes. On Neal’s death, his basis in the preferred will receive a step-up in basis equal to

the fair market value of the preferred. The FLLC could make an IRC Sec. 754 election and

receive a basis step-up of some of its assets commiserate to the step-up in basis of Neal’s

preferred.

below:

This example, after the conversion of $10,000,000 of the $12,000,000 note, is illustrated

4. The Potential IRC Sec. 2036(a)(2) Advantage of the Structure.

What should a taxpayer who wishes to have some impact on FLLC distributions do to

prevent the potential application of IRC Sec. 2036(a)(2)? The taxpayer should either adopt a

strategy of selling all of his member interests, except the management interest, for full

consideration, or take one of the following actions:

24 Rev. Rul. 83-120, 1983-2 C.B. 170.

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(i) The retained distribution power is subject to a standard that could be

enforced by a court;

(ii) A managing member interest that has distribution power could be

contributed by the taxpayer to a trust where the taxpayer has the right to

remove and replace the trustee, as long as the replacement is not related or

subordinate; or

(iii) A managing member interest, that has the distribution power, could be

contributed by the taxpayer to a corporation and the taxpayer could retain

the voting stock and transfer the non-voting stock to his family.

Normal partnership fiduciary duties should be affirmed in the FLLC agreement, including

fiduciary constraints on the distribution power that are consistent with Mr. Byrum’s constraints in

United States v. Byrum25. In order to provide protection for management that is acceptable under

IRC Sec. 2036(a)(2), consider providing for arbitration for any partner disagreements with

management decisions. Consider providing that management will only be liable for decisions that

are not within the confines of the business judgment rule. Also consider providing in the FLLC

agreement that any party who loses that arbitration action shall pay for all costs associated with

that arbitration action.

If the donor member is going to retain a distribution power, consideration should be given

to having the distribution power of the managing member limited to a standard that may be

enforced by a court. See Rev. Rul. 73-143, 1973-1 C.B. 407. This may be crucial. If the donor of

a member interest is the sole managing member, any gifts of member interests may be brought

back into the donor’s estate under IRC Sec. 2036(a)(2), if the ability to accumulate income for a

member is considered to be a legal right to designate that another person (i.e. another member)

enjoys the past, current or future income of the FLLC. Stated differently, if the O’Malley analysis

applies to partnerships and if the transfer of the member interest is not for adequate and full

consideration, IRC Sec. 2036(a)(2) may apply unless the dispositive powers are limited by

standards that a court can enforce. If the dispositive powers retained by the donor member are not

limited by standards, it may not matter what other actions or drafting constraints are present (with

the possible exception of a sale for adequate and full consideration). On the other hand, the

transferred member interest will not be included in the donor’s estate under IRC Sec. 2036(a)(2)

where the only distribution power is one subject to a definite external standard subject to

supervision by a court. If a power is so constrained, the donor does not have the legal right to

designate the persons who shall possess or enjoy the property or the income therefrom. The

original source of this doctrine is Jennings v. Smith,26 which has now been approved by the IRS in

Rev. Rul. 73-143.

25 408 U.S. 125 (1972).

26 161 F.2d 74 (2d Cir. 1947).

SSE01WM -27-

A caveat: the application of the doctrine to powers that, though subject to an enforceable

standard, are exercisable in favor of the creator of the power is uncertain. Thus, this approach has

greater certainty in negating IRC Sec. 2036(a)(2) with respect to gifted member interests than

with respect to FLLC assets deemed retained by the decedent under IRC Sec. 2036(a)(1). Stated

differently, the standard may put more pressure on any potential Sec. 2036(a)(1) argument by the

IRS. Obviously, this is not a concern, if the taxpayer only retained de minimis member interests

(i.e., that member has already transferred all but a small portion of the member interests).

Secondly, in those situations where significant member interests have been retained, if as a

matter of FLLC practice, the FLLC distributions pursuant to the standard are different than the

income earned by the FLLC assets, the standard may buttress the argument that the decedent-

managing member did not retain income rights with respect to the underlying FLLC assets.

Furthermore, if the managing member retains most of his non-managing member interest, there is

significant authority that the underlying assets that the managing member originally

contributed will not be brought back into that member’s estate under IRC Sec. 2036(a)(1),

because the retained right with respect to the distributions is a retained right with respect to the

member interest and not a retained right with respect to the underlying assets of the FLLC. See

Estate of Boykin v. Commissioner, T.C. Memo 1987-134, 53 T.C.M. 345, (1987). Boykin

(according to legislative history) led to the passage of the infamous IRC Sec. 2036(c), in which

Congress overturned existing case law and applied IRC Sec. 2036 to include the contributed

assets to an “enterprise” back into the member or shareholder’s estate. In 1990, Congress

repudiated its previous work and repealed IRC Sec. 2036(c) (thus, implicitly approving the result

of Boykin). Stated differently, the prevailing case law with respect to entities, and recent

Congressional legislative history when IRC Sec. 2036(c) was repealed, may be persuasive that

rights with respect to income of significant retained member interests should not be considered

rights to possess the member assets or income.

An example of FLLC drafting that provides a distribution power that is subject to court

enforcement is the following:

No Other Distributions. Except as provided in this Article, the FLLC shall

make no distributions of cash or other property to any Member until its liquidation

as provided in Section .

Distributable Cash. Distributable Cash includes only that cash held by the

FLLC at the end of a Fiscal Year after reasonable reserves of cash have been set

aside by the FLLC Management, subject to the duties imposed by Section , for

working capital and other cash requirements, including current and reasonably

projected expenses, current and reasonably projected investment opportunities, and

reasonably anticipated contingencies. For purposes of this Section, any of the

FLLC Assets which are contributed to the FLLC by the Members, any borrowed

funds, and any cash generated upon the sale of any of the FLLC Assets, including

FLLC Assets which are purchased with borrowed funds and including the cash

attributable to appreciation in value, shall be considered as necessary for

investment purposes.

SSE01WM -28-

Operating Distributions. From time to time during each Fiscal Year, the

FLLC may distribute any part or all of the Distributable Cash proportionately to

each of the Members based on their Percentage Interests; provided that no more

than sixty days after each Fiscal Year, the FLLC shall distribute all of the

Distributable Cash proportionately to each of the Members based on their

Percentage Interests. No distributions under this Section shall have the effect of

changing any of the Percentage Interests.

To ensure that there are no issues with IRC Sec. 2036(a)(2), caution would indicate that

the method listed above should be implemented, even if the donor is not a managing member,

because the donor may be imputed with the actions of other members, as per the analysis of the

Court in Strangi,27 and because of the Court’s interpretation of the “in conjunction with any

person” rule of IRC Sec. 2036(a)(2).

If discretion is not removed from the managing member, is it sufficient protection under

IRC Sec. 2036(a)(2) for the transferor not to act as managing member? The answer should be yes.

In this regard, however, it should be noted that there are two pitfalls that must be planned for.

First, the donor must not bear such a relationship to any of the managing members that their

powers will be attributed to him. For example, in Strangi, the manager was the donor's attorney-

in-fact, who had established the partnership, and the manager's powers were imputed to the donor.

Whether this principle would be extended to, for example, the donor's children or spouse, is

uncertain, but a strong argument can be made that it should not be extended to anyone, such as a

child or spouse, who could serve as trustee of a trust created by the donor without triggering

IRC Sec. 2036(a)(2). However, it should be noted that the person who had Mr. Strangi’s

power of attorney (Mr. Gulig) could have served as trustee without triggering IRC Sec.

2036(a)(2). Second, the donor must not have any rights as a member that could affect the timing

of distribution of income. One such right identified by Judge Cohen was the right as limited

partner to participate in a vote to dissolve the partnership. While this holding was questionable

(see the discussion of joint action as a retained "power" above), it cannot be ignored until it is

overturned. In effect, the non-managing members (or at least the donor as a non-managing

member) must be stripped of any rights normally pertaining to non-managing members under

state law that could implicate IRC Sec. 2036. It is difficult to say where the line must be drawn

but, as a practical matter, safety is achieved only by stripping the transferor of all voting rights he

would otherwise have as a non-managing member.

If a donor member wishes to have some influence on distributions, but does not wish to

have distributions subject to an enforceable standard, the donor member could utilize Rev. Rul.

95-58. For instance, the potential donor-managing member could bifurcate the powers of the

managing member. That is, one managing member interest could have all of the powers of

management, except the discretionary right to make distributions. Another managing member

interest would only have rights with respect to determining the distributions of the FLLC. The

donor managing member would not own the managing member interest that has the distribution

27 Estate of Albert Strangi, et al v Commissioner, 85 T.C.M. 1331 (2003).

SSE01WM -29-

power. The “distribution power” managing member interest could then be contributed to a trust.

The donor could retain the right to remove the trustee, and under Rev. Rul. 95-58, 1995-2 C.B.

151, as long as the successor trustee is not related or subordinate to the donor, concerns about the

application of IRC Sec. 2036(a)(2) are addressed.

If a donor member wishes to retain the distribution power (and not delegate it to a

“removable” independent trustee) and have that power “free” of an enforceable standard, except

to the extent fiduciary restraints exist in the corporation consistent with the Byrum case,

consideration should be given to utilizing the safe harbor under Revenue Ruling 81-15, 1981-1

C.B. 457. The managing member interest, including all powers with respect to making

discretionary distributions of the FLLC, could be contributed by the taxpayer to a subchapter S

corporation. The voting rights of the stock of the corporation could be bifurcated between full

voting stock and limited voting stock (e.g., a ratio of 1:99). The “limited” voting stock may be

allowed to only vote on decisions with respect to dissolution of the FLLC or the corporation. The

potential donor could then transfer both non-managing member interests and a majority of the

stock that has the limited voting rights to a trust for the benefit of others in his family. Even

though the taxpayer controls a corporation, which in turn controls distributions from the FLLC,

Revenue Ruling 81-15, in combination with the reasoning of the Byrum case, appears to provide a

safe harbor from application of IRC Sec. 2036(a)(2) to such transfers.

5. Valuation Advantage of the Leveraged FLLC Asset GRAT.

See the discussion in Section I B 1 of this paper.

6. Ability of Grantor to Pay For Income Taxes Associated With Holdco, the

GRAT and Remainder Grantor Trust Gift Tax-Free and Substitute Assets

of Holdco, the GRAT and Remainder Grantor Trust Income Tax-Free.

See the discussion in Section I B 2 of this paper.

7. Synergy With Other Techniques.

See the discussion in Section I B 3 of this paper.

8. Comparatively Low Hurdle Rate.

See the discussion in Section I B 4 of this paper.

9. High Leverage.

See the discussion in Section I B 5 of this paper.

10. Non-Recourse Risk to Remaindermen.

See the discussion in Section I B 6 of this paper.

SSE01WM -30-

11. The “Atkinson” Worry About Paying a GRAT Annuity With a

Hard-to-Value Asset May Be Eliminated.

If the annuity amount is kept relatively small because of the use of leverage, then there

may be enough cash flow to pay the annuity with cash or near cash. In Example 1 there would be

more than enough cash flow to and from the FLLC to pay both the interest on the note and the

GRAT annuity. Obviously, there are no valuation issues with cash. The U.S. Court of Appeals

for the Eleventh Circuit (see Atkinson, 309 F.3d 1290 (11th

Cir. 2002), cert denied, 540 U.S. 945

(2003)),28 has held that an inter vivos charitable remainder annuity trust’s (CRAT’s) failure to

comply with the required annual payment regulations during the donor’s lifetime resulted in

complete loss of the charitable deduction. The Court found that the trust in question was not

properly operated as a CRAT from its creation. Even though the subject CRAT prohibited the

offending acts of administration, the Court held that the CRAT fails.

In a similar fashion, the IRS could take the position that if the GRAT trustee’s

administrative practices violate the regulations under IRC Sec. 2702, then the interest retained by

the grantor will not be a qualified interest. Just as in the Atkinson case, it may not matter if

appropriate savings language is in the document. As explored below, there are many areas in

which the administration of a GRAT may fail, including the following: (i) inadvertently engaging

in an activity that would constitute an underpayment of the amount owed to the grantor, which

would constitute a deemed contribution; and/or (ii) inadvertently engaging in an activity that

would constitute an acceleration of the amounts owed to the grantor (a commutation).

In order to have a successful GRAT, it is obviously desirable to have an asset that has

significant potential for appreciation. It is desirable from a volatility and potential growth

standpoint to contribute, in many instances, a hard to value asset to the GRAT. Many of the asset

classes that have that potential for appreciation (e.g., closely held partnership interests, real estate,

hedge funds and other private equity investments) are very difficult to value accurately.

The problem with a GRAT that owns hard to value volatile assets is that when it is time to

pay the retained annuity amounts to the grantor, it is often difficult to value the asset that is being

used to satisfy the annuity obligation. If the distributed asset is finally determined to have had too

low a value when it is used to satisfy the annuity amount owed by the GRAT, it could be deemed

to be an additional contribution by the annuitant to the GRAT, which is prohibited. See Treas.

Reg. §25.2702-3(b)(5). On the other hand, if it is finally determined that the hard to value asset

that is distributed in satisfaction of the annuity payment to the grantor had too high a value, it

could be determined by the IRS that such a payment is a commutation, which is also prohibited.

See Treas. Reg. §25.2702-3(d)(5). Thus, the trustee of the GRAT, which is frequently also the

grantor, must be very careful, like Goldilocks, to make sure that the annuity payments are “just

right”. Using hard to value assets, to make the “just right” payments, may be highly problematic.

Language in the trust requiring that any payment be retroactively adjusted if later found to be

incorrect may help, but is not certain to negate an Atkinson type challenge.

28

See also C.C.A. 200628028 (July 14, 2006).

SSE01WM -31-

12. There May Be Less Danger That the Retained Note Will Be

Recharacterized as a Deemed Retained Interest in a Trust Under Equitable

Tax Principles With This Technique Than With a Sale to a Grantor Trust.

The IRS has purportedly made the argument under certain circumstances (e.g., when there

is significant leverage) that, in substance, the sale for a note to the grantor trust is a contribution to

the trust with a deemed retained interest.29 If, under equitable tax principles, the transaction is

treated as a deemed contribution to the trust with a deemed retained trust interest, severe gift tax

and estate tax consequences could accrue under IRC Secs. 2702, 2036 and 2038. Unfortunately,

there are no authorities that can provide the taxpayer with guidance on an amount of leverage that

may safely be used with a trust.

It should also be noted that the IRS, in its recent Priority Guidance Plan issued on July 31,

2015, appears to be taking dead aim at the sale for a note to a grantor trust that is subject to a

defined value assignment.30

The GRAT/FLLC technique employs leverage, but the leverage is in the organization of

the entity. Numerous debt/equity tax cases exist regarding whether the debt is treated as a

disguised equity in that context. There is ample authority and guidelines on that subject,

particularly in interpreting IRC Sec. 385.31 Furthermore, as noted above, assuming the FLLC is

29 The IRS made that argument in Karmazin (T.C. Docket No. 2127-03, 2003), but the case was settled on

terms favorable to the taxpayer. In Dallas v. Commissioner (T.C. Memo 2006-72), the IRS originally made that

argument, but dropped the argument before trial. The IRS is currently making both of those arguments in two

docketed cases, Estate of Donald Woelbing v. Commissioner (Docket No. 30261-13) and Estate of Marion Woelbing

v. Commissioner (Docket No. 30260-13).

30 Please see 3, 5, and 8 of that guidance plan, which states as follows:

3. Guidance on basis of grantor trust assets at death under §1014.

…

5. Guidance on the valuation of promissory notes for transfer tax purposes under §§2031,

2033, 2512, and 7872.

…

8. Guidance on the gift tax effect of defined value formula clauses under §§2512 and 2511.

31 In the corporate context see IRC Sec. 385(b); Miller v. Commissioner, T.C. Memo 1996-3, 71 T.C.M.

(CCH) 1674; see the discussion of what constitutes a valid indebtedness in Todd v. Comm'r., T.C. Memo 2011-123,

aff’d per curiam 486 Fed. App. 423 (5th

Cir. 2012); see also IRC Sec. 385 (titled “Treatment of Certain Interests In

Corporations As Stock or Indebtedness”); Notice 94-47, 1994–1 C.B. 357. See also, Staff of the Joint Committee on

Taxation, “Federal Income Tax Aspects of Corporate Financial Structures,” JCS-1-89, at 35-37 91989), noting that

various courts have determined that the following features, among others, are characteristic of debt:

SSE01WM -32-

recognized for transfer tax purposes, if the note is found not to be a note under equitable tax

principles, the note will be treated as retained equity in the FLLC. The note should not be treated

as a retained interest in a trust with the attendant IRC Secs. 2702 and 2036 considerations.

See also the discussion in Section III C 3 and 4 of the paper.

13. There is Greater Authority That a Sale to a Single Member FLLC Will Be

Treated as a Nontaxable Sale to a Disregarded Entity For Income Tax

Purposes Than There is For a Sale to a Grantor Trust.

While many practitioners believe a sale to a grantor trust should be treated as a sale to a

disregarded entity, the law is not clear that a grantor trust will be disregarded for sale purposes as

it is for a sale to a single member FLLC. It is clear that a single member FLLC is disregarded for

all income tax purposes. 32 In Rothstein v. Commissioner 33 the Second Circuit ruled that a

purchase from a grantor trust is not ignored because the phrase under IRC Section 671 “shall be

treated as the owner of the trust assets” only applied for purposes of including the trust’s income

and deductions. See also the commentaries of distinguished professors Mark Asher34 and Jeff

Pennell.35 There also exist revenue rulings and Treasury regulations in which the IRS has ruled

grantor trusts are not disregarded for all income tax purposes, such as the TEFRA unified audit

rules36 disposition of a partnership interest,37 and certain cancellation of indebtedness rules.38

1) a written unconditional promise to pay on demand or on a specific date a sum certain in money in return

for an adequate consideration in money or money’s worth, and to pay a fixed rate of interest; 2) a preference

over, or lack of subordination to, other interests in the corporation; 3) a relatively low corporate debt to equity

ratio; 4) the lack of convertibility into the stock of the corporation; 5) independence between the holdings of

the stock of the corporation and the holdings of the interest in question; 6) an intent of the parties to create a

creditor-debtor relationship; 7) principal and interest payments that are not subject to the risks of the

corporation’s business; 8) the existence of security to ensure the payment of interest and principal, including

sinking fund arrangements, if appropriate; 9) the existence of rights of enforcement and default remedies; 10)

an expectation of repayment; 11) the holder’s lack of voting and management rights (except in the case of

default or similar circumstance); 12) the availability of other credit sources at similar terms; 13) the ability to

freely transfer the debt obligation; 14) interest payments that are not contingent on or subject to management

of board of directors’ discretion; and 15) the labelling and financial statement classification of the instrument

as debt. Some of these criteria are the same as those specified in §385, but this elaboration is a more extensive

summary of the factors applicable in making the determination.

32 See Treas. Reg. §301.7701-3(a); Treas. Reg. §301.7701-3(b)(1)(ii) and Treas. Reg. §301.7701-2(a).

33 735 F.2d 704 (2

nd Cir. 1984).

34 Mark L. Asher, When to Ignore Grantor Trusts: The Precedents, a Proposal, and a Prediction, 41 Tax. L.

Rev. 253 (1986).

35 Jeffrey N. Pennell, (Mis) Conceptions About Grantor Trusts, 50

th Annual Southern Federal Tax Institute.

36 Rev. Rul. 2004-88, 204-32 I.R.B. 165.

37 Treas. Reg. §1.001-2(c), Ex. 5.

38 Prop. Treas. Reg. §1.108-9(c)(1), (2).

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14. The Leveraged FLLC Asset GRAT Avoids the Necessity of Continually

Creating GRATs Using the So-called “Cascading GRATs” Technique.

Using this technique is a one time solution at the end of the GRAT annuity period, the

grantor has a perfect freeze (the grantor only owns a note and a small equity interest). The grantor

does not need to keep forming GRATs to freeze his estate, which saves on legal and appraisal

costs and is also administratively easier to execute.

15. The Leveraged FLLC Asset GRAT Technique, in Combination With a

Long Term Lease That Has Generous Terms to the Lessor (and Under

Which the Donor is the Lessee), May Be an Ideal Technique For Those

Assets in Which it is Difficult to Determine the Fair Market Value Terms

of a Long Term Lease Such as a Long Term Lease For Art or a Residence.

Consider the following example:

Example 2: Al Art Wishes to Use the Above

Leveraged FLLC Asset GRAT Technique to Plan For His Art

Al Art believes he and his wife, Alma, have a 25-year life expectancy. Al owns various

FLLCs that have $70,000,000 in financial investments before valuation discounts, private equity

that has $25,000,000 in value before valuation discounts, $5,000,000 in financial assets that are

not in any FLLCs, and art that has a fair market value of $10,000,000.

Al believes that over the next 25 years his financial investments will average a 7.4%

annual return before taxes (with .60% of the return being taxed at ordinary rates, 2.4% of the

return being tax free and 4.4% of the return being taxed at long term capital gains rates with a

30% turnover rate). Al believes that over the next 25 years his private equity will average a 7.4%

annual return (with 3.4% of the return being taxed at ordinary rates and 4% of the return being

taxed at long term capital gains rates with a 10% turnover rate). Al believes his art will average

an annual increase of 8% a year for the next 25 years and the art will never be sold.

Other key assumptions that Al is making are that the annual inflation rate will be 2.5%

over the next 25 years and that he and Alma will annually spend $2,000,000 a year, inflation

adjusted. Al believes a 30% valuation discount is appropriate for his private equity investments

and his various financial asset FLLCs. If Al contributes his assets in a single member FLLC, Al

believes an additional 20% valuation discount will be appropriate in valuing a non-member

interest in a FLLC.

Al likes the technique of contributing an interest in a leveraged FLLC to a GRAT. Al is

considering contributing his art to the FLLC subject to a 25-year lease with generous terms to the

lessor. Al consulted with valuation experts to determine the terms of a lease that would be

generous to the lessor in order to “slam the door shut” on any potential argument that the lease

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was not for “full and adequate consideration.”39 After that consultation, Al determined that the

terms of the lease should be a triple net lease with Al paying all of the insurance and other

expenses of the art and an annual rental fee of $1,000,000 (which is 10% of the current value of

the art) with an increase in the rent each year by a factor of three times the annual inflation rate

(e.g., if the inflation rate is 2.5%, the increase in the rent for that year will be 7.5%). Assuming an

annual inflation rate of 2.5% for the next 25 years, and a present value discount rate of 8%, the

lease will have a net present value of $22,731,152 and the residual value of the art at the end of

the lease term will have a present value of $10,000,000 (for a total value of $32,731,152).

Al would like to compare (i) doing no further planning with (ii) contributing an interest in

a leveraged FLLC that does not own the art and with (iii) contributing an interest in a leveraged

FLLC that does own the art subject to the lease with generous terms described above.

The proposed Leveraged FLLC Asset GRAT technique without art being contributed to

the FLLC subject to the lease is illustrated below:

39 This author would like to thank Garry Marshall and Brad Gates of Stout Risius Ross for their assistance

with this example. Mr. Marshall and Mr. Gates used their experience with the Mei Moses®

Fine Art Index and other

sources to help this author construct an art lease with generous terms to the lessee.

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The proposed Leveraged FLLC Asset GRAT technique with art being contributed to the

FLLC subject to the lease is illustrated below:

A comparison of the results in 25 years with (i) no further planning, (ii) Leveraged FLLC

Asset GRAT that does not own art to a GRAT, and (iii) Leveraged FLLC Asset GRAT that does

own art to a GRAT are shown in the table below (also see Schedule 2 attached):

Table 2

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One advantage of using a generous long-term lease agreement to the lessor is that it should

eliminate IRC Sec. 2036 being applied to include the art in the lessee’s estate. It also helps ensure

that Al has not retained an interest in the trust for purposes of IRC Sec. 2702. A leasehold interest

for full consideration is not a “term interest” under IRC Sec. 2702. See Treas. Reg. §25.2702-4.

The disadvantage, of course, is that it will increase the value of the gift of the art since it is subject

to a valuable lease. The increase is the difference of the net present value of the lease and the

residual value of the art (assumed in this example to be $32,731,152) in comparison to the value

of the art without a lease (assumed in this example to be $10,000,000) or an increase of

$22,731,152. The Leveraged FLLC Asset GRAT technique decreases the amount of gift tax

exposure of a generous lease by the retention by the donor of a note equal to 90% of the present

value of the art subject to the advantageous lease, and the donor’s retention of the increased

annuity payments of the GRAT.

The use of a generous lease coupled with the above technique could also be used for

residences and summer residences as an alternative to qualified personal residence trusts.

Art that is subject to a lease is a difficult asset to value. If the IRS believes the value

should be higher (which would be a great finding from the perspective of avoiding IRC Sec.

2036), the valuation adjustment clause of the GRAT will mitigate the gift tax exposure to the

donor.

C. Considerations of the Technique.

1. Part or All of the Net Value of the Leveraged FLLC Interests Owned By the

GRAT and the Then Value of the Outstanding Note Receivable From the

FLLC Could Be Taxable in the Grantor’s Estate, if the Grantor Does Not

Survive the Term of the GRAT.

If the grantor does not survive the term of the GRAT, the IRS takes the position that IRC

Sec. 2036 will include the assets of a GRAT in the grantor’s estate equal to the lesser of the value

of the assets in the GRAT, or the dollar amount of the retained annual annuity divided by the then

IRC Sec. 7520 rate.40 Under the facts of Example 1, if the IRC Sec. 7520 rate increases to 5%

before the GRAT terminates, and if the grantor dies before the end of the term of the GRAT, the

lesser of the net value of the GRAT or $10,246,240 ($512,321 ÷ 5%) will be included in the estate

of the grantor (Neal Navigator). Assuming the assets earn 7.4% annually before taxes the net

value of Holdco in three years will be $12,381,520, assuming valuation discounts will not be

allowed. Please see Schedule 1 attached to this paper. However, that amount is greater than

$10,246,240. Thus, the maximum amount included under IRC Sec. 2036 under those facts, is

$10,246.240. The then principal amount of the note is also included in the grantor’s estate under

IRC Sec. 2033.

40 See Treas. Reg. §§20.2036-1(c)(2)(i); 20.2036-1(c)(2)(iii), Ex 2.

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There are a number of techniques to eliminate the IRC Sec. 2036 concern that a death by

the grantor of the GRAT will include some or all of the GRAT assets in the grantor’s estate.

Please see the discussion in Section II D of this paper.

One of the techniques is for part of the liquidity that is directly or indirectly owned by the

GRAT to be invested in life insurance instead of financial assets to hedge against Neal’s early

death. As noted above, if the IRC Sec. 7520 rate rises to 5% at the time of Neal’s death, because

of the formula under the IRC Sec. 2036 regulations, the maximum under the facts of Example 1

that will be included in Neal Navigator’s estate because of the GRAT annuity is $10,246.620

($512,321 ÷ 5%). Also, if Neal dies before the GRAT annuity ends, under IRC Sec. 2033 the

value of Neal’s note receivable and the 1% retained managing member interest will also be

taxable in his estate. The estate taxes associated with the IRC Sec. 2036 and IRC Sec. 2033

inclusion with Neal’s early death could be mitigated or “hedged,” if either the Holdco FLLC or

Financial Assets LP purchases life insurance with Neal being the insured. There is a long line of

authority that life insurance owned by a partnership entity is only taxable in the insured’s estate

under IRC Sec. 2033, and is not included in the insured’s estate under IRC Sec. 2042.41

Under Example 1, assume Neal is 60 years old and Financial Assets, LP buys a

combination of 10-year term life insurance and permanent life insurance to pay for the potential

estate tax cost of Neal’s passing within three years of creating the Leveraged FLLC Asset GRAT.

Assuming the estate tax rate is 40%, Neal would need to purchase a maximum of $4,098,648 of

term life insurance ($10,246,620 x 40%) to pay the estate taxes because of the IRC Sec. 2036

inclusion of the GRAT, and a maximum of $6,689,880 ($16,724,700 x 40%) of permanent life

insurance to pay for the IRC Sec. 2033 inclusion of Neal’s note receivable and the remaining 1%

member interest in Holdco FLLC.

The cost of the ten year term life insurance premiums to hedge or pay for the potential IRC

Sec. 2036 inclusion would be $10,893 each year. The annual cost of the $6,689,880 permanent

life insurance policy to hedge or pay for the potential IRC Sec. 2033 inclusion would be $93,362 a

year.42 Thus for an annual outlay of $104,255, which is .417% of the assets subject to the

Leveraged FLLC Asset GRAT in this example, Neal Navigator’s early death estate tax problem is

solved.

Under those facts, if Neal is then in the maximum estate tax bracket and has used all of his

estate tax exemption, and has an early death, the synergy of the use of the Leveraged FLLC Asset

41 See Treas. Reg. §20.2042-1(c)(2); Estate of Knipp v. Commissioner, 25 T.C. 153 (1955), aff’d on another

issue, 244 F.2d (4th

Cir. 1957), cert denied, 355 U.S. 827 (1957), acq. in result, 1959-1 C.B. 4; Rev. Rul. 83-147,

1983-2 C.B. 158; Watson v. Commissioner, 36 T.C.M. (CCH) 1084 (1977); Estate of Fuchs v. Commissioner, 47 T.C.

199 (1966); Estate of Infante v. Commissioner, 29 T.C.M. (CCH) 903 (1970); and Estate of Tompkins v.

Commissioner, 13 T.C. 1054 (1949).

42 Many thanks to Preston Sartelle of Capital Strategies Group, Inc. who used certain current assumptions of

current TIAA-CREF life insurance products to give the author the above annual premium assumptions.

SSE01WM -38-

GRAT and the use of life insurance is quite remarkable. The loss of the family’s net worth is

reduced from 40% to a little over 1%.

Obviously, after the GRAT annuity period ends the IRC Sec. 2036 exposure also ends and

Neal could terminate the term life insurance and the associated premiums. Neal could also

terminate or reduce the permanent life insurance premiums as his IRC Sec. 2033 estate tax

exposure because the retained note is also reduced.

2. The Leveraged FLLC Asset GRAT is More Complex to Initially Create

Than the Traditional GRAT (But it is Less Complicated Than Using the

Alternative “Freeze” Technique of Cascading GRATs That Would Be

Created Each Year).

While this technique solves considerations in paying GRAT annuities with hard to value

assets and has the distinct advantage of substantially outperforming other GRAT techniques, it is

more complex to initially create. However, after the termination of the GRAT, it should not be

any more complex to administer than a sale of partnership interests to a grantor trust.

3. Care Must Be Taken to Make Sure That There is Not an “Issuance of a

Note, or Other Debt Instrument, Option, or Other Similar Financial

Arrangement, Directly or Indirectly, in Satisfaction of the Annuity

Amount.”

If there is an indirect issuance of a note in satisfaction of the retained GRAT annuity

amounts, the annuity amounts will not be considered qualified annuity interests and the annuity

amounts will be worth zero in determining the gift to the remainder trusts. See Treas. Reg.

§25.2202-3(b)(1). In the context of the examples of this outline, the gift would be the fair market

value of the non-managing member interests that were transferred to the GRATs. That gift would

be comparatively low, around 8% of the gross value of the assets of the FLLC (assuming a 20%

valuation discount and 90% leverage with respect to the FLLC), but the indirect issuance of a note

in satisfaction of the annuity amount should be avoided.

Borrowing from others to make annuity payments is not addressed in the regulations, but

is expressly acknowledged as being acceptable in the preamble to the regulations, if the step

transaction doctrine does not apply. Borrowing from the grantor for other purposes, such as to

enable the trust to make other investments (or the entity the GRAT owns to make other

investments like the Holdco, FLLC in this example), is not addressed and, therefore, should be

viewed as permissible, subject to the “directly or indirectly” step transaction caveat (see the

discussion in Section III C 4 below). Usually, it should be easy to trace the borrowing proceeds

SSE01WM -39-

from a grantor to an investment by the GRAT, or some other use by the GRAT (e.g., paying

expenses), other than making an annuity payment.43

4. Care Must Be Taken to Make Sure That the IRS Cannot Successfully Take

the Position That the Creation of Holdco, FLLC Should Be Ignored For

Gift Tax Purposes and That the Retained Notes Are In Reality Retained

Trust Interests in the GRAT That Do No Constitute a Qualified Annuity

Interest Under IRC Sec. 2702.

Holdco, FLLC could be disregarded under two different theories: (i) a single member

FLLC should be per se disregarded for both income tax purposes and transfer tax purposes and/or

(ii) even if single member FLLC’s should not be disregarded for transfer tax purposes on a per se

basis, the step transaction doctrine applies to the facts of the transaction and the FLLC is

disregarded for transfer tax purposes.

The argument that the FLLC should not be ignored for gift tax purposes on a per se basis,

or under the step transaction doctrine, is greatly strengthened if the FLLC is also partially owned

by another disregarded entity (e.g., an existing grantor trust) before the donor contributes his

part of the non-managing member interests in the FLLC to the GRAT(s).

For instance, consider the following modification of Example 1 with an existing grantor

trust also contributing to Holdco FLLC:

43 See the discussion by Ronald D. Aucutt in “Grantor Retained Annuity Trusts (GRATs) and Installment

Sales to Grantor Trusts.” The American Law Institute Continuing Legal Education Planning Techniques for Large

Estates (April 8-10, 2015).

SSE01WM -40-

Even though the single member FLLC is per se disregarded for income tax purposes (see

Treas. Reg. §301.7701-3(b)(1)(ii)), it is not disregarded for gift tax purposes. In Pierre v.

Commissioner, 133 T.C. 24 (2009), the full Tax Court held that because transfer taxes follows

state law property rights, interests in a single member FLLC were valued for gift tax purposes as

FLLC interests and not, as the IRS argued, with reference to underlying asset values.44 The IRS

has not acquiesced in the decision.

As noted in the examples, care should be taken to make sure that the leveraged creation of

FLLC is recognized as an independent transaction under the step transaction doctrine. In applying

the step transaction doctrine, the IRS or court may not treat the various steps of the transfer as

independent. Instead, the steps may be collapsed into a single transaction. 45 Under the

circumstances of the gift of a non-managing member interest in a leveraged FLLC to a GRAT, the

crucial key to not run afoul of the step transaction doctrine may be establishing that the creation of

the FLLC should stand on its own, especially if there is another owner of the FLLC as in the above

example. Could the act of a transferor creating the leveraged FLLC be independently separated

from the gift to the GRAT? The creation of the FLLC should be designed to be sufficiently

independent on its own and as an act that does not require a gift to the GRAT. There does not

have to be a non-tax purpose for the creation of and gift to the GRAT. It is difficult for this writer

to understand the non-tax purpose of any gift.

The Supreme Court has said on two separate occasions that estate and gift tax law should

be applied in a manner that follows a state property law analysis.46 Thus, the key questions could

be, is the creation of the FLLC with leverage recognized for state property law purposes, and is its

creation independent of any other events, including the subsequent gift to the GRAT? Stated

differently, for state law property purposes, would the creation of the FLLC be recognized

independent of the gift to the GRAT? It would seem to this writer that in many situations it could

be demonstrated that the creation of the FLLC did not require a gift to the GRAT for state law

property purposes or for tax purposes. Furthermore, creating a FLLC with debt has economic risk

to the current owners and future owners of the FLLC. The creation of the FLLC has both risk and

reward. The value of the FLLC assets could depreciate below the value of the note. Depending

upon the size of the transaction, 10% equity may represent real risk in comparison to the reward of

the leverage. One percent equity may not.

An excellent discussion of the interrelationship of creating a FLLC, transferring a member

interest in a FLLC, state property law, federal transfer tax law and the step transaction doctrine is

found in the Linton47 case. This case involved the identification of what was transferred for gift

44

A subsequent memorandum decision, T.C. Memo 2010-106, applied the step transaction doctrine to

collapse certain sale and gift transfers of 9.5% and 40.5% into single 50% transfers.

45 See Donald P. DiCarlo, Jr., “What Estate Planners Need to Know About the Step Transaction Doctrine,”

45 Real Prop. Tr. & Est. L.J. 355 (Summer 2010).

46 See United States v. Bess, 357 U.S. 51 (1958); Morgan v. Commissioner, 309 U.S. 78 (1940).

47 See Linton v. United States, 630 F.3d 1211 (9th Cir. 2011); see also the following cases which also held

that the step transaction doctrine did not apply under the facts of the case: Holman v. Commissioner, 601 F.3d 763

SSE01WM -41-

tax purposes. The Linton’s transferred certain assets to a FLLC and then transferred the FLLC

interests to trusts for the Linton family. The question before the court was whether, for gift tax

purposes, the transfers were the assets contributed to the FLLC or the FLLC interests. The court

held the transfers were the FLLC interests:

The state law of gifts informs our analysis of whether and when the donor has parted with

dominion and control in a manner adequate to give rise to federal tax liability. See Jones

v. Comm'r, 129 T.C. 146, 150 (2007) (“In order to make a valid gift for Federal tax

purposes, a transfer must at least effect a valid gift under the applicable State law.”); cf.

United States v. Nat'l Bank of Commerce, 472 U.S. 719, 722 (1985) (“[I]n the application

of a federal revenue act, state law controls in determining the nature of the legal interest

which the taxpayer had in the property.” (quotation omitted)); Aquilino v. United States,

363 U.S. 509, 514 n. 3 (1960); Shepherd v. Comm'r, 115 T.C. 376, 384 (2000), aff'd 283

F.3d 1258 (11th Cir. 2002) (“look[ing] to applicable State law . . . to determine what

property rights are conveyed”). This conclusion follows from the general principle that

federal tax law “creates no property rights but merely attaches consequences, federally

defined, to rights created under state law.” Nat'l Bank of Commerce, 472 U.S. at 722

(quotation omitted); Morgan v. Comm'r, 309 U.S. 78, 80 (1940) (“State law creates legal

interests and rights. The federal revenue acts designate what interests or rights, so

created, shall be taxed.”); cf. United States v. Mitchell, 403 U.S. 190, 197 (1971)

(explaining that “federal income tax liability follows ownership. . . . In the determination

of ownership, state law controls.”).

* * *

The step transaction doctrine treats multiple transactions as a single integrated

transaction for tax purposes if all of the elements of at least one of three tests are satisfied:

(1) the end result test, (2) the interdependence test, or (3) the binding commitment test.

True v. United States, 190 F.3d 1165, 1174-75 (10th Cir. 1999). Although the doctrine

considers the substance over the form of the transactions, “‘anyone may so arrange his

affairs that his taxes shall be as low as possible; he is not bound to choose the pattern

which will best pay the Treasury.'" Brown, 329 F.3d at 671 (quoting Grove v. Comm'r,

490 F.2d 241, 242 (2d Cir. 1973)).

The step transaction doctrine has been described as “combin[ing] a series of individually

meaningless steps into a single transaction.” Esmark, Inc. & Affiliated Cos. v. Comm'r, 90

T.C. 171, 195 (1988). We note as a threshold matter that the government has pointed to

no meaningless or unnecessary step that should be ignored. Nonetheless, examining the

step transaction doctrine in light of the three applicable tests, we conclude that its

application does not entitle the government to summary judgment.

(8th Cir. 2010); Senda v. Commissioner, 433 F.3d 1044 (8th Cir. 2006); Gross v. Commissioner, T.C. Memo

2010-176 (2010). But see Heckerman v. United States, 104 A.F.T.R.2d 5551 (W.D. Wash. 2009), which held the step

transaction doctrine did apply.

SSE01WM -42-

The end result test asks whether a series of steps was undertaken to reach a particular

result, and, if so, treats the steps as one. True, 190 F.3d at 1175. Under this test, a

taxpayer's subjective intent is “especially relevant,” and we ask “whether the taxpayer

intended to reach a particular result by structuring a series of transactions in a certain

way.” Id. The result sought by the Lintons is consistent with the tax treatment that they

seek: The Lintons wanted to convey to their children LLC interests, without giving them

management control over the LLC or ownership of the underlying assets. Ample

evidence supports this intention. The end result sought and achieved was the gifting of

LLC interests. If the transactions could somehow be merged, the Lintons would still

prevail, because the end result would be that their gifts of LLC interests would be taxed as

they contend.

The interdependence test asks “whether on a reasonable interpretation of objective facts

the steps were so interdependent that the legal relations created by one transaction would

have been fruitless without a completion of the series.” Associated Wholesale Grocers,

Inc. v. United States, 927 F.2d 1517, 1523 (10th Cir. 1991) (quotation marks omitted).

Under this test, it may be “useful to compare the transactions in question with those we

might usually expect to occur in otherwise bona fide business settings.” True, 190 F.3d at

1176.

The placing of assets into a limited liability entity such as the FLLC is an ordinary and

objectively reasonable business activity that makes sense with or without any subsequent

gift. In Holman v. Commissioner, the Tax Court stated that the creation of a limited

partnership was not necessarily “fruitless” even if done in anticipation of gifting

partnership interests to the taxpayers' children. 130 T.C. 170, 188, 191 (2008) (holding

the creation of the limited partnership and the subsequent transfer of partnership interests

should not be treated as a single transaction). The Lintons' creation and funding of the

FLLC enabled them to specify the terms of the FLLC and contribute the desired amount

and type of capital to it—reasonable and ordinary business activities. These facts do not

meet the requirements of the interdependence test.

The binding commitment test asks whether, at the time the first step of a transaction was

entered, there was a binding commitment to take the later steps. Comm'r v. Gordon, 391

U.S. 83, 96 (1968). The test only applies to transactions spanning several years. True, 190

F.3d at 1175 n. 8; Associated Wholesale Grocers, 927 F.2d at 1522 n. 6; McDonald's

Rests. of Illinois, Inc. v. Comm'r, 688 F.2d 520, 525 (7th Cir. 1982) (rejecting application

of the test for transactions spanning six months). Here, the Lintons' transactions took

place over the course of no more than a few months, and arguably a few weeks. The

binding commitment test is inapplicable.

The government is therefore not entitled to summary judgment based on an application of

the step transaction doctrine.

SSE01WM -43-

If the potential IRS position that the FLLC does not exist for gift tax purposes were to

prevail, FLLC would not afford any additional discount, but the discount of the assets owned by

FLP would still apply.

If the creation of the FLLC is ignored for gift tax purposes, then under equitable tax

principles the sale and contribution of the underlying assets of the FLLC is to the GRAT instead of

to the FLLC. The value of the GRAT will increase. Assuming the valuation discount for the

transferred non-managing member interests is 20%, then ignoring the valuation discounts will

increase the value of the GRAT by 20% and the GRAT annuity amounts will increase by 20%.

If the creation of the FLLC is ignored for gift tax purposes, does it matter what the terms of

a trust are in determining if the cushion is adequate on a sale to a trust in order to have a note

recognized as a note instead of as a retained interest in the trust? It may matter. On its face, there

may be plenty of cushion on the sale and the note would be recognized as a note. However, the

terms of this trust, after payment of trust obligations, are that all of the net assets are to be

distributed to the grantor of the trust (who is also the owner of the note) unless there is growth of

the assets. Does the fact that the GRAT is in effect a short term trust in which most of its assets

are to be distributed to the grantor, after payment of the outstanding note to the grantor, equitably

convert the note to a retained interest in the trust? If the note is treated as a retained interest in

trust, the terms of the note may not comply with the definition of a qualified payment under IRC

Sec. 2702 and the gift will be all of the assets of the GRAT minus the annuity payments that do

qualify.

5. Care Must Be Taken if the Underlying Asset That is Sold or Contributed to

the Single Member FLLC is Stock in a Subchapter S Corporation.

Assuming the FLLC is a single member FLLC and/or is owned by other disregarded

entities for income tax purposes, the FLLC may own subchapter S stock.48 If the FLLC is not a

single member FLLC, it will not be a permissible shareholder of a subchapter S corporation and

the subchapter S election will be terminated. If the FLLC terminates and dissolves on the single

member’s death, the subchapter S election may be preserved.

48 See PLRs 9739014, 9745017, 200107025 and 20008015. These rulings do not consider whether an FLLC

having a grantor and grantor trust as members will be considered to have only one owner and therefore remain a

disregarded entity, but they support that result.

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IV. A LEGAL STRUCTURE THAT MAY ALWAYS ENSURE A SUCCESSFUL GRAT:

FUNDING A LEVERAGED FLLC ASSET GRAT WITH A GUARANTEED

PREFERRED PARTNERSHIP INTEREST AND FUNDING ANOTHER

LEVERAGED FLLC ASSET GRAT WITH SLIGHTLY DIFFERENT BENEFICIARIES

WITH A GROWTH PARTNERSHIP INTEREST.

A. The Technique.

The technique involves first creating a FLP or a FLLC that has two different economic

interests: a preferred interest that annually pays a guaranteed coupon and a growth interest that is

allocated on liquidation of the assets that are not paid to the owner of the preferred interest. The

guaranteed annual preferred coupon is fixed and is not contingent as to time or amount. It is paid

annually even if there are not any profits. Upon liquidation of the FLP the preferred interest

owner is entitled to all of the assets of the partnership up to the value of the initial contributions

for the preferred interest, which is commonly called the “par” value of the preferred interest. On

liquidation, the growth interest owner is entitled to all of the assets that are not allocated to the

preferred interest.

If the taxpayer owns both a guaranteed coupon preferred interest and a growth interest he

may wish to contribute the guaranteed coupon preferred interest and the growth interest to

separate Leveraged FLLC Asset GRAT structures. Even in flat or declining markets the Leveraged

FLLC Asset GRAT structure, which owns the guaranteed coupon preferred interest, will be

successful (assuming the markets do not decline much below what is owed to the preferred interest

owner). In markets where there is significant appreciation the technique will also work much

better, because of the significant valuation discounts that may be present with respect to the

contribution of the growth interests to a Leveraged FLLC Asset GRAT.

Consider the following example:

Example 3: Grat Gratuitous Uses a Legal Structure in Conjunction

With a GRAT That Works Well Whether a $10,000,000 Single Stock Asset

Grows Substantially in Value, is Flat in Its Growth, or Declines in Value

Grat Gratuitous contributes his $10,000,000 single stock to a FLLC (“Single Stock

FLLC”) in return for managing and non-managing member “growth” interests and a preferred

interest of $8,000,000 that pays a 7.0% guaranteed annual coupon that may be paid in kind. The

guaranteed annual preferred coupon is fixed and is not contingent as to time or amount. It is paid

annually even if there are not any profits earned by Single Stock FLLC.

Grat Gratuitous could contribute and sell his preferred interest, using the Leveraged

FLLC Asset GRAT technique, in Single Stock FLLC (total assumed value of $8,000,000) to a

single member FLLC (“Preferred Holdco FLLC”) of which he is the sole owner, in return for

managing and non-managing member interests and a three year note that pays the short term

AFR rate of 0.48% (Note #1). (Transaction #2 in the diagram below.) Grat Gratuitous could

contribute his non-managing member interest in Preferred Holdco FLLC to an irrevocable

three-year GRAT #1. (Transaction #3 in the diagram below.) If the IRC Sec. 7520 rate is 2% and

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if the non-managing member interest in Preferred Holdco FLLC has a valuation discount of 20%,

then the three-year GRAT annual annuity will be $219,702.

Grat Gratuitous could contribute $300,000 in miscellaneous financial assets and his 99%

non-managing member “growth” interest in Single Stock FLLC to Growth Holdco FLLC in

consideration for a three year note of $1,517,400 that pays the AFR rate of 0.48% (Note #2) and

managing and non-managing member interests in Growth Holdco FLLC. (Transaction #4 in the

diagram below.) Grat Gratuitous could contribute his non-managing member interest in Growth

Holdco FLLC to an irrevocable three-year GRAT #2. The remainder grantor trust of the GRAT,

Grantor Trust #2, and GRAT #2 could have slightly different beneficiaries and/or payouts than

GRAT #1 and Grantor Trust #1. (Transaction #5 in the diagram below.) If the IRC Sec. 7520 rate

is 2%, if the non-managing member growth interest in Single Stock FLLC has a 30% valuation

discount, and if the non-managing member interest in Growth Holdco FLLC has a 20% valuation

discount, then the three-year GRAT annual annuity will be $46,302.

The structure is illustrated below:

B. Advantages.

1. This Legal Structure Works Extremely Well in All Markets.

As the table below illustrates, the structured technique works much better than a

traditional three year GRAT. The table below, for determining what passes to the remainderman

of the GRAT, ignores valuation discounts. See Schedule 3 attached to this paper.

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Table 3

As the calculations in the table above demonstrate, if under this technique there is no

growth of the stock asset, the technique works as well as a traditional GRAT would work if the

stock annually grew at a 9.44% pre-tax return for three years. If the stock does annually grow at

a 9.44% pre-tax return for three years under this technique, the technique works as well as stock

annually growing at a 16.76% pre-tax return with a traditional GRAT for three years. If the stock

does annually grow at a 16.76% pre-tax return for three years, this structured technique will

work 73.31% better than a traditional GRAT structure.

The reason why this technique works much better than a conventional GRAT in flat or

down markets is because one of the GRATs owns a guaranteed preferred interest on a leveraged

basis. The assumed preferred return is much higher than the AFR rate and the IRC Sec. 7520 rate.

The IRS took the position in Revenue Ruling 83-120 that preferred interests in closely held

entities should have a very high return because they are not marketable. As long as the single

stock does not decline more than the “cushion” in Single Stock FLLC, which is available to

annually pay in kind the preferred return and the “par” value of the preferred on liquidation of

Single Stock FLLC, the technique will be successful.

The reason why this technique works much better than a conventional GRAT in a good

market is because of the greater valuation discounts associated with the Leveraged FLLC Asset

GRAT that owns the growth interest. There is a significant arbitrage created when a heavily

discounted asset that is leveraged is contributed to the GRAT, which determines the size of the

GRAT annuity and undiscounted cash is used to pay that GRAT annuity.

The synergies of two Leveraged FLLC Asset GRATs with one holding a preferred interest

and one holding a growth interest is impressive. However, how much does the preferred/growth

entity add to the very good results of a single Leveraged FLLC Asset GRAT (see Section III of the

paper).

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Perhaps a good way to compare the additive of using a preferred/growth entity is to use the

facts and assumptions of Example 1 and assume that Holdco, FLLC is not created with leverage

but does have a preferred interest and a growth interest. Neal Navigator could then contribute the

preferred interest to a leveraged FLLC that is called Preferred FLLC and the growth interest to

another leveraged FLLC that is called Growth FLLC. Please see the diagram below:

The comparative results are as follows (also see Schedule 1 attached):

Table 3a: Same Facts as Example 1

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Table 3b: Same Facts as Example 1

Table 3c: Same Facts as Example 1

Obviously, the results are improved over just using the Leveraged FLLC Asset GRAT.

However, there is a level of complexity in adding the preferred/growth FLLC layer that on the

balance may supersede the improved results of adding that layer.

2. The Gift Tax Valuation Rules Under IRC Sec. 2701 Do Not Apply,

Because of the Exception for Guaranteed Return Preferred Interests.

The guaranteed preferred interest is not an applicable retained interest under IRC Sec.

2701 because it is not a distribution right under IRC Sec. 2701. See IRC Sec. 2701(c)(1)(B)(iii)

and IRC Sec. 2701(b)(1). If the guaranteed return preferred is not an “applicable retained

interest,” then the gift tax valuation rules under IRC Sec. 2701 do not apply. See IRC Sec.

2701(a)(1)(B).

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3. This Technique Has the Same Advantages as the Leveraged FLLC Asset

GRAT Technique.

Please see the discussion in Section III B of this paper.

C. Considerations.

1. There May Be Additional Income Tax Consequences if the Guaranteed

Preferred Interest is Not Owned By Grantor Trusts.

If there is less taxable income earned by the Single Stock FLLC than the coupon amount of

the guaranteed preferred interest then there will be more taxable income than what was generated

by the single stock. However, if Single Stock FLLC is a disregarded entity, and if the trusts are all

disregarded entities, then the grantor is taxed only on the earnings of Single Stock FLLC and the

trusts are not taxable on the coupon paid by the income tax disregarded Single Stock FLLC.

2. This Technique Has the Same Considerations as the Leveraged FLLC

Asset GRAT.

Please see the discussion in Section III C of this paper.

3. The GRATs and the Remainder Trusts Should Have Different Provisions

in Order to Avoid the IRS Treating the Two GRATs as One GRAT Under

Equitable Tax Principles.

The GRATs could have different payouts and could be created at different times in order

to avoid this concern. The remainder grantor trusts to the two different GRATs could also have

different beneficiaries and different powers of appointment in order to avoid this concern.

V. POSSIBLE STRUCTURAL SOLUTIONS TO ALLOW THE ALLOCATION OF THE

GST EXEMPTION UPON THE CREATION OF A GRAT.

A. Introduction.

The “conventional wisdom” this author sometimes hears on this subject is as follows:

“the remainderman of a GRAT cannot be a generation-skipping trust” or “you can use the

leverage of a GRAT for gift tax purposes, but you cannot use that leverage for generation-

skipping tax purposes.” This “conventional wisdom,” under the circumstances described below,

may be incorrect.

As noted above, a GRAT can be structured to have almost no gift tax value attributable to

the remainderman, valued as of the creation of the trust. If the asset that has been contributed to

GRAT outperforms the IRC Sec. 7520 interest rate, that outperformance results in a gift tax free

gift to the remainderman. Thus, the gift tax exemption can be substantially leveraged using the

GRAT technique.

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It is generally thought that the generation-skipping tax exemption of the grantor may not

be leveraged in a similar fashion. This is because of the estate tax inclusion period (“ETIP”) rule

found in IRC Sec. 2642(f)(3), which provides as follows:

Any period after the transfer described in paragraph (1) during which the

value of the property involved in such transfer would be includible in the gross

estate of the transferor under Chapter 11 if he died. The transferor’s exemption

for generation-skipping tax purposes cannot be allocated until after the ETIP

period. (Emphasis added.)

Stated differently, whether a generation-skipping transfer has occurred cannot be

determined until after it is determined whether the property will be included in the grantor’s

estate. If the period passes, and it is clear the property will not be included in the grantor’s estate,

then and only then, may the grantor’s GST exemption be allocated.

B. If There is a 5% or Less Probability That Estate Tax Inclusion Will Occur Because

of the Death of the Grantor, is There an Exception to the ETIP Rules Applying,

Which Allows an Upfront Allocation of a GST Exemption?

Treas. Reg. §26.2632-1(c)(2) contains the regulatory definition of ETIP and then provides

an exception, as follows:

For purposes of paragraph (c)(2) of this section, the value of transferred

property is not considered as being subject to inclusion in the gross estate of the

transferor or the spouse of the transferor if the possibility that the property will be

included is so remote as to be negligible. A possibility is so remote as to be

negligible if it can be ascertained by actuarial standards that there is less than a 5

percent probability that the property will be included in the gross estate.

(Emphasis added.)

For a short term GRAT there will often be less than a 5% probability that the grantor will

die during the GRAT term. For example, this will be true for a two-year GRAT unless the grantor

is above 70 years of age. In such a case, the exception noted above would literally apply. On this

reading of the exception, the ETIP rules will not apply to an allocation of GST exemption, upon

creation of the GRAT because there is less than a 5% chance that the grantor will die during the

GRAT term. Thus, a grantor age 70 or younger can create a two-year GRAT in which the

remainderman is a generation-skipping trust, make an upfront allocation of the GST exemption.

If the grantor wishes to have a zero inclusion for GST purposes for the trust, can he use an

amount of upfront allocation of the GST exemption that is equal to the amount of the taxable gift

of the GRAT remainder, which subtracts the retained GRAT annuity in determining the gift? Or

does the grantor, if he wishes to have a zero inclusion for GST purposes for the trust, have to make

an upfront allocation of the GST exemption that is equal to the full value of the trust without

subtracting the annuity payments? There is not any definitive authority on this subject, but most

commentators believe the IRS will resist the result that an upfront allocation of the GST

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exemption equal to the gift tax amount works to achieve zero inclusion.49 Ed Manigault and Mil

Hatcher discuss this issue and note the following:50

Although it appears that some GRATs should fall outside of the ETIP

rule—depending on the age of the grantor and the term of the annuity period—it is

not clear how much GST exemption would need to be allocated to the GRAT to

provide for a zero inclusion ratio. If the allocable amount necessary to produce a

zero inclusion ratio was tied to the taxable gift amount, then using a nearly

zeroed-out GRAT would seem to permit the allocation of an amount only equal to

the minimal taxable gift.

The provisions for allocation of GST exemption, however, do not clearly

define the allocation amount based on the amount of the taxable gift. Instead, the

regulations arguably point to the amount of the property transferred, not to the

amount of the taxable gift. See Treas. Reg. §26.2632-1(b)(1)(i), (2)(i) and (ii), and

(4). This approach is consistent with the determination of the applicable fraction

(for purposes of calculating the inclusion ratio), which has as its denominator the

value of the property transferred to the trust. See Treas. Reg. §26.2642-1(c)(1). It

might then be the position of the IRS that, if the above interpretation of the ETIP

exception is accurate, a grantor must allocate GST exemption equal to the amount

transferred to the GRAT, not the minimal taxable gift created as a result of the

funding of the GRAT.

The argument that the authors make is that the amount transferred for generation-skipping

tax purposes should be offset by the consideration received by the grantor. In the case of the

GRAT, the consideration received is the present value of the amount of the annuities that the

grantor is to receive. In the case of a transfer to a generation-skipping trust, pursuant to a bargain

sale, it is commonly accepted that the amount of the GST exemption that needs to be allocated is

the amount of the transfer after subtracting the value of the consideration received. The natural

question is, why should the result be different if the consideration received is an annuity (from a

GRAT) as opposed to a seller-financed note from a non-GRAT trust? To take the analogy a little

bit further, assume that a grandparent makes a bargain sale to an “old and cold” adequately funded

trust (presumably a defective grantor trust) in which the consideration for the “sale” part of the

bargain sale is not a seller financed note, but a private annuity. One would assume that the selling

grandparent should be able to insulate the trust from GST taxes by allocating her GST exemption

in an amount equal to the “bargain” gift component (this assumes the annuity will be recognized

on its own terms and not as a disguised retained income interest that is subject to IRC Sec. 2036).

Thus, the question is why should a transaction involving a bargain sale private annuity be treated

49 See Private Letter 200107015: Covey and Hastings, Recent Developments 2007, 42nd Annual Heckerling

Institute of Estate Planning, University of Miami School of Law (page 295). See Manigault and Hatcher, GRATs and

GST Planning – Potential Pitfalls and Possible Planning Opportunity, 20 Prob. & Prop. 28 (2006).

50 See Manigault and Hatcher, GRATs and GST Planning – Potential Pitfalls and Possible Planning

Opportunity, 20 Prob. & Prop. 28, 32 (2006).

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differently than a transaction involving an annuity from a GRAT, as far as determining the amount

of the property transferred for GST tax exemption allocation purposes?

The taxpayer should assume that the ETIP rules do not apply if there is less than a 5%

probability that a GRAT will be included in the gross estate and the GST exemption may be

allocated on the creation of the GRAT. However, a conservative taxpayer should assume in

allocating the GST exemption on the creation of the GRAT, if an inclusion ratio of “0” is desired,

that he should allocate a GST exemption amount that is equal to the amount of the property

transferred, without netting out the retained GRAT annuity.

Even if the conservative analysis is the correct analysis, allocating a GST exemption to a

Leveraged FLLC Asset GRAT on its creation could still work very well for generation-skipping

transfer tax purposes. In other words, using that GRAT structural technique, when the ETIP rules

do not apply, and allocating GST exemption to the GRAT assets on creation of the GRAT, even if

there is not an offset for the retained GRAT annuity, is not much of a “penalty.” The reason why

there is not much of a penalty with that structural technique is because the retained GRAT annuity

is a relatively modest part of the leverage being employed in the transfer to the GST exempt trust.

For instance, see Example 1 in Section III B 1. Assume the grantor in that example is

young enough that there is only a 5% probability that the grantor will die during the GRAT

annuity period. Because of the leverage embedded in the contributed FLLC member interest to a

GRAT and the assumed valuation discounts, the taxpayer would only have to allocate $1,471,774

of his GST exemption to make the GRAT and the remainder trust exempt from the generation-

skipping transfer tax because those trusts will have a zero inclusion ratio. That is obviously

more than the one dollar gift tax exemption that needs to be allocated. However, it may still be an

efficient use of the GST tax exemption as Tables 1a, 1b and 1c illustrate. At the end of three years,

because of the arbitrage of discounted assets going into the GRAT and a relatively modest

amount of cash being used to pay the GRAT annuities, even if the assets grow at the modest

IRC Sec. 7520 rate of 2.2%, the GST trust would, upon termination of the GRAT in three years,

have a value of $7,771,229 (see Table 1a in Section III B of this paper), if the valuation discounts

are ignored in valuing the GST assets at that time. That is clearly an efficient use of the upfront

allocation of $1,471,774 in GST exemption.

C. Is There a Technique That Uses the Leverage of the GRAT to Indirectly Profit a

GST Trust in Which a Skip Person is Not the Remainderman of the GRAT at the

Beginning or End of the ETIP (and Does the Technique Work)?

Another interesting inquiry is whether a grandparent who creates a GRAT will be deemed

to have made a transfer that is subject to generation-skipping taxes, if the remainderman at the

beginning and at the end of the ETIP period of the GRAT is not a skip person? The answer would

seem to be no.

However, does that answer change if the original remainderman, who is not a skip person,

during the ETIP period transfers, for full and adequate consideration, sells her remainder interest

to an existing generation-skipping trust that the remainderman has created and at a later time buys

back that remainder interest (presumably before the ETIP period ends)? In other words, has the

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grandparent who created the GRAT made a generation skipping transfer despite naming a

non-skip person as the remainderman who in fact receives the remainder after the ETIP period

ends? If the original remainderman and the remainderman at the end of the ETIP period is a

non-skip person, but during the ETIP period there are non-taxable transfers by the remainderman

to and from a generation-skipping trust, has a generation-skipping transfer been made? Consider

the following example:

Example 4: Granny Selfmade Creates a GRAT

That, Because of the Non-Skip Remainderman’s

Actions, Indirectly Benefits a Generation-Skipping Trust

Granny Selfmade creates a GRAT with a retained annuity amount that results in a very

low gift for gift tax purposes to the remainderman, her daughter, Betsy Bossdaughter. The terms

of the trust agreement creating the GRAT provide that if Granny survives the two-year term of the

GRAT, but Betsy does not survive the term of the GRAT, the remaining proceeds of the GRAT, if

any, are to pass to Betsy’s two children, Bob and Brenda Bossdaughter.

Betsy is grateful for the creation of the GRAT by her mother, but she feels that her mother

has already done enough estate planning for her benefit. Betsy is interested in transferring

wealth to her children. Thus, Betsy makes an independent gift to a generation-skipping trust in

which the primary beneficiaries are her children, Bob and Brenda. The generation-skipping trust

is an intentionally defective grantor trust with Betsy being the grantor. In the early days of the

GRAT, while the actuarial value of the remainder interest is very low, Betsy, for full and adequate

consideration, sells her remainder interest to the GST trust she created.

The GRAT is very successful. Before the end of the two-year term (or ETIP period) Betsy

decides to buy back the remainder interest for full and adequate consideration (perhaps with a

seller-financed note). Thus, on termination of the GRAT, Betsy is once again, the only

remainderman beneficiary.

The technique is illustrated below:

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Granny asked her tax advisor, Pam Planner, whether she owes any generation-skipping

transfer taxes on termination of the GRAT because of Betsy’s actions.

Before Pam, or anyone, can answer this question, certain key concepts must be understood

in addition to the applicability of the ETIP rules. What is a “transfer” for purposes of Chapter 13?

In certain contexts “transfer” is shorthand for “generation-skipping transfer”, which is a defined

term. The generation-skipping transfer is one of the three defined GST taxable events: taxable

termination, taxable distribution, or direct skip. However, in certain other contexts of Chapter 13,

“transfer” refers to the original transfer of property establishing a trust. The transferor, for

generation-skipping tax purposes is “the individual with respect to whom property was most

recently subject to federal estate or gift tax.” See Treas. Reg. §26.2652-1(a)(1).

Another area where it is important, under Chapter 13, to determine whether a

generation-skipping tax transfer has occurred is determining the inclusion ratio when additional

transfers are made to a trust. Any addition requires a recompilation of the trust’s applicable

fraction and, thus, its inclusion ratio and requires allocation of GST exemption to preserve a zero

inclusion ratio. Treas. Reg. §26.2642-4 seems to suggest that no addition to a trust can occur

without a gift or an estate taxable transfer. A transfer for full and adequate consideration is not

such a transfer and should not be an addition.

Under these definitions, Pam Planner advises Granny that there appears to be no transfer

that would incur GST tax or require an allocation of GST exemption to avoid tax. However,

consideration must be given to Private Letter Ruling 200107015. This ruling involved a zeroed-

out charitable lead annuity trust (“CLAT”) and a proposed gift assignment by a child who was a

one-sixth vested remainderman. The gift would be to a trust, which is a generation-skipping trust

with respect to the grantor of the CLAT. The purpose of the ruling was to determine whether the

child would be treated as the transferor for GST purposes instead of the grantor of the CLAT. The

IRS refused to grant the request of a favorable ruling:

Section 2642(e) provides a special ruling for determining the inclusion

ratio for any ‘charitable lead annuity trust.’ Under §2642(e) and the applicable

regulations, in the case of a charitable lead annuity trust the applicable fraction (1)

the numerator of which is the adjusted generation-skipping transfer tax exemption

(‘adjusted GST exemption’), and (2) the denominator of which is the value of all

property in the trust immediately after the termination of the charitable lead

annuity. The adjusted GST exemption is the amount of GST exemption allocated

to the trust increased by an amount equal to the interest that would accrue if an

amount equal to the allocated GST exemption were invested at the rate used to

determine the amount of the estate or gift tax charitable deduction, compounded

annually, for the actual period of the charitable lead annuity. The amount of GST

exemption allocated to a charitable lead annuity trust is not reduced even though it

is ultimately determined that the allocation of a lesser of GST exemption would

have resulted in an inclusion ratio of zero. Under §2642(e)(3), a ‘charitable lead

annuity trust’ is defined as any trust providing an interest in the form of a

guaranteed annuity for which the transferor is allowed a charitable deduction for

Federal estate or gift tax purposes under §§2055 and 2522.

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In the absence of §2642(e), little or no GST tax would ever be imposed

with respect to certain charitable lead annuity trusts, even if no GST exemption is

allocated to the trust. That is, if the value of the assets transferred to the trust was

equal to the estate tax charitable deduction allowed with respect to the transfer,

then under the general rules of §2642, the inclusion ratio with respect to the trust

would be zero and the trust would be exempt from GST tax. Even if the charitable

deduction did not equal the value of the transferred assets, an allocation of only a

small amount of GST exemption would have resulted in no GST tax. Congress

was concerned that allowing the present value of the charitable interest to reduce

the denominator of the applicable fraction permitted the leveraging of the GST tax

exemption. If the trust assets sufficiently outperform the rate of return assumed in

computing the present value of the charitable interest, the amount passing to

noncharitable persons can exceed the amount which would have passed to them

had there been no charitable interest in the trust. S. Rep. No. 445, 100th

Cong., 2d

Sess. 368 (1988).

. . .

We also note that under the facts presented in the ruling request, the form

of the transaction might be disregarded and the series of transactions viewed as the

designation by the Trustee of Child A’s children as remainder beneficiaries.

Under this analysis, Decedent would be treated as the transferor of the entire Trust

estate for GST tax purposes. See Estate of Bies v. Commissioner, T.C. Memo.

2000-338; Estate of Cidulka v. Commissioner, T.C. Memo. 1996-149; Griffin v.

United States, 42 F. Supp. 2d 700 (W.D. Tex. 1998).

The ruling’s basic holding can be viewed as uniquely applicable to the charitable lead

annuity trust. However, it is clear that the IRS will look for other opportunities to apply equitable

doctrines in similar contexts. Stated differently, the ruling’s reasoning could apply just as easily

to a GRAT, if the reader substituted the phrase “ETIP rules” for “IRC Sec. 2642(e).” Using the

same logic, the Service could find that a gift by a GRAT remainderman is avoidance of the

Congressional intent in enacting the ETIP rules. However, would the equitable doctrines inherent

in the ruling apply to a sale by Betsy in above Example 4? It would appear that the answer should

be no.

In using a sale for full and adequate consideration, the issue is not whether Granny or

Betsy is the transferor of the property that moves from the GRAT to the dynasty trust. The issue is

whether there is an addition to the dynasty trust for GST purposes. There should not be an

addition to the dynasty trust for GST purposes when Betsy transfers the remainder interest to the

GST trust for full and adequate consideration and when Betsy buys the remainder interest back for

full and adequate consideration.

Another hurdle for the IRS is that for property law purposes and gift tax purposes,

Granny’s only transferee is a non-skip person (Betsy Bossdaughter). It would seem that the IRS,

in order to be successful, would have to argue that a generation-skipping tax transfer occurred by

Granny when Betsy sold for full consideration the remainder interest to the generation-skipping

trust she created, even though you could not determine whether a generation-skipping transfer has

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occurred until after it was determined if Granny Selfmade survived the annuity term (and at that

point, the only beneficiary of the GRAT was a non-skip person). The cumulative hurdle of those

positions may be very difficult for the IRS to surmount.

D. The Remainder Interest in a GRAT That is Indirectly Held By the Grantor of the

GRAT is Sold For Full and Adequate Consideration to an Old Exempt GST.

Consider the following example:

Example 5: Granny Transfers a Remainder Interest in a GRAT For Full and

Adequate Consideration to a Pre-Existing Generation-Skipping Transfer Trust

Granny Selfmade transfers cash and near cash equal to $5,000,000 to a two-year GRAT.

The GRAT pays an annuity equal to 46.49% at the end of each year at a time when the IRS Sec.

7520 rate is 2.2%. The remainder beneficiary is Granny FLLC. Shortly after the creation of the

GRAT, Granny transfers, for full and adequate consideration, all of her interest in Granny FLLC

to an existing generation-skipping trust that is also a grantor trust. The technique is illustrated as

follows:

Granny files a gift tax return reporting both transactions 1 and 2 above. In the gift tax

return Granny reports that the transfer was for full and adequate consideration.

1. Advantages.

a. The Technique Should Avoid Gift Taxes.

Granny should not have any gift tax exposure with transaction 1. The combined value of

Granny’s retained annuity in the GRAT and Granny’s ownership of the FLLC should eliminate

any gift. With respect to transaction 2, Granny’s sale of her membership in the FLLC will be a gift

only if the consideration received is less than the full value of the FLLC.

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b. Assuming the Grantor of the GRAT Receives Full Consideration,

the Technique Should Avoid All Estate Taxes and Generation-

Skipping Transfer Taxes, Even if the Grantor Dies During the

Term of the GRAT Annuity.

IRC Sec. 2036(a) does not apply if Granny receives full consideration. However, if there

is even a $1.00 gift, and if Granny dies during the term of the GRAT, all of the value of the GRAT

at the time of Granny’s death, will probably be brought back into her estate minus the value

Granny received in transaction 1 and 2 (see IRC Sec. 2043).

c. When the GRAT Terminates and the Existing GST Grantor Trust

Receives Granny’s FLLC Interest, That Should Not Be Treated as

an Addition For Purposes of Requiring an Adjustment to the

Existing GST Grantor Trusts Inclusion Ratio, Assuming the

Existing GST Grantor Trust Pays Full Consideration for Granny’s

Interest.

Please see the discussion in Section V E 1 of this paper. If an addition is made to a trust

above the trust’s payment of consideration for that addition its inclusion ratio is adjusted to reflect

the addition. See IRC Sec. 2642(d). However, when a trust with a zero inclusion ratio makes a

profitable investment, the receipt of the profit will not change its inclusion ratio.

2. Considerations.

a. There is No Authority That Explicitly Supports the Advantage

Outlined Above in Sections C and D, Other Than the Analysis

Offered in This Paper.

The consequence of the analysis offered in this paper being incorrect is to put the grantor

back in the same position she would have been in if she had created a conventional GRAT.

b. It is Crucial For the Grantor to Have Received Full Consideration

in Above Transaction 2.

In order to make sure the sale of the remainder FLLC is for full consideration, the grantor

may wish to consider entering in a defined value allocation assignment when selling to the

existing grantor trust.51

51 See this author’s paper, “Planning For the 0.2% as if They Were Part of the 99.8%: Some of the

Best Planning Strategies We See That Reduce Both Income Taxes and Estate Taxes,” 49 U Miami

Heckerling Institute on Estate Planning ¶402.1[C][6] (2015 University of Miami); also see this

author’s paper, “The Art of Donating Your Cake to Your Family and Eating It Too: Current Gift

Planning Opportunities Using Strings That Are Not Considered Attached By the Donor,” 47 U

Miami Heckerling Institute on Estate Planning, ¶602.2[C][5] (2013 University of Miami).

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c. Other than the GST Consideration, This Technique Has the Same

Considerations Delineated in Sections I C and III C of This Paper.

d. It May Be Crucial That the Remainder Interest of the GRAT That is

Sold Has Substance and is Not a De Minimis Amount.

Please see the discussion in Section V E 1 of this paper.

E. The Creation of a GRAT For Full and Adequate Consideration.

1. The Technique.

Consider a GRAT that is created with a substantial remainder interest; however, because

of a purchase of a remainder interest of the GRAT upon its creation, there is not a gift. That is,

instead of making a gift of the remainder interest, what if the grantor of a GRAT sold it for full and

adequate consideration to a pre-existing trust upon its creation? IRC Sec. 2036 inclusion does not

apply if the grantor dies before the GRAT term ends, and as a consequence, the ETIP limitation

may also not apply and the creation of the GRAT may not constitute a transfer to the GST trust.

Consider the following example:52

Example 6: Lenny Leverage Enters Into a GRAT With the

Remainderman Being an Existing Grantor Trust That is a

Generation-Skipping Transfer Trust, With the Existing Generation-Skipping

Transfer Trust Purchasing the Remainder Interest For Full Consideration

Several years ago, Lenny Leverage created a generation-skipping transfer trust that is

also a grantor trust. The GST trust and Lenny contributed certain assets to a FLP. Lenny’s

interest in the partnership, after considering valuation discounts, is worth $21 million and the

GST trust’s interest in the partnership is worth $2,000,000. The GST trust transfers that

$2,000,000 partnership interest to Lenny Leverage in full consideration for Lenny Leverage

contributing his $21 million interest in the FLP to a GRAT that is designed with a defined value

formula annuity which increases 20% a year. The formula produces a remainder value of $2

million under IRC Sec. 7520. The liquidation value of the partnership interest that is transferred

to the GRAT is $30 million and the appraised fair market value of the transferred partnership

interest is $21 million (30% discount). The partnership, at that time, has 15 years to operate

before it terminates. Lenny has $1,500,000 outside the partnership. Lenny is 50 years old.

The technique is illustrated below:

52 There are other alternative forms of designing a GRAT that is formed for adequate and full consideration.

In order to avoid estate tax inclusion of the value of the remaining annuity payments and future estate income taxes, if

the grantor does not live past the annuity term, the GRAT annuity payments (which will have to be higher to provide

full consideration) could be designed to terminate at the shorter of the grantor’s life or the stated term. The GRAT

could be designed to be a joint contribution GRAT. In that circumstance, care should be taken to make sure the same

assets (e.g., partnership units of the same partnership) are being contributed by the grantor and the GST trust to the

GRAT.

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It is crucial to avoid valuation issues with this technique. The purchase price for the

remainder interest must be consistent with the valuation assumptions of the GRAT. Thus, using

“apples to apples”, such as partnership units in the same partnership, will facilitate adequate and

full consideration being paid for the remainder interest in the GRAT.

Please note the table below, which delineates the amount that is projected to be transferred

to Lenny’s children, grandchildren and great grandchildren pursuant to this technique in

comparison to not doing any further planning with respect to the partnership. The table assumes

Lenny’s death at the end of year 20, Lenny consumes $100,000 a year with a 3% inflation rate, an

8% pre-tax rate of return with 2% being taxed at ordinary income rates (35%) and 6% at capital

gains rates (15%, with a 30% turnover). Assume that the partnership, at the time of the creation of

the purchase GRAT, has only 15 years remaining and that the valuation discount is 30%. See

Schedule 4 attached to this paper.

Table 4

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The results are obviously very significant. Will this work? An argument can certainly be

made that the creation of the purchase GRAT is not subject to the ETIP rules and the creation of

the GRAT does not constitute a transfer to the GST trust. If Lenny died during the 20-year term of

the GRAT, the GRAT property will not be includible in his gross estate.53 Only the remaining

actuarial value of the unpaid annuity amounts of the GRAT would be included under IRC Sec.

2033.

What would be the results, if the GRAT was for the shorter of 20 years or Lenny’s death?

The annuity amounts would be higher. The technique would have income tax and estate tax

advantages if Lenny died during the 20 years. See the results below and see attached Schedule 4a:

Table 5

There could be abusive situations where the remainder interest is very small and the logic

of the Wheeler, D’Ambrosio and Magnin cases would not be applied. However, under the facts

assumed under this example, the remainder interest is significant and would seem to be analogous

to the remainderman values considered in the Circuit Court cases cited below in the footnote.

2. Constitutionally, There is Probably a Need For a Transfer Before GST Tax

Can Apply.

Possible further support of the argument that a GST tax under the assumed facts of

Examples 4, 5 or 6 cannot apply, because there has not been a transfer for estate and gift tax

purposes, is the proposition that an imposition of a generation-skipping transfer tax under those

circumstances would constitute a direct tax on the property contributed to the trust rather than an

indirect (excise) tax on a transfer. Before an excise tax (known as the generation-skipping tax) on

53 See Wheeler v. United States, 116 F.3d 749 (5

th cir. 1997); Estate of D’Ambrosio v. Comm’r, 101 F.3d 309

(3d Cir. 1996); Estate of Magnin v. Comm’r, 183 F.3d 1074 (9th

Cir. 1999); contra, Gradow v. United States, 11 Cl.

Ct. 808 (1987), aff’d, 897 F.2d 516 (Fed. Cir. 1990).

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a transfer can occur, there must be a transfer. There does appear to be a transfer under the

above-assumed facts. See the discussion above under Examples 4, 5 and 6.

The generation-skipping tax valuation must be based on the value of that interest when

transferred from one person to another, not the value when held by the transferor, because of the

limit in the Constitution on the federal government’s ability to tax. The Constitution provides that

“[n]o Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or

Enumeration herein before directed to be taken.”54 In plain terms, therefore, all direct taxes are

unconstitutional unless levied across the country in proportion to the states’ populations. This

clear constitutional prohibition against direct taxes raises two questions: (i) what is meant by a

direct tax; and (ii) under what circumstances will a gift, estate, or generation-skipping tax not be

considered a direct tax?

a. What Constitutes a Direct Tax?

The definition of direct taxes is found in Pollock v. Farmers’ Loan & Trust Co.55 The

issue before the Supreme Court in Pollock was the constitutionality of a federal income tax. The

taxpayer argued that a tax on the income from property is the same thing as a direct tax on the

property itself.56 In agreement, the Supreme Court held clearly and conclusively as follows:

First. We adhere to the opinion already announced, that, taxes on real

estate being indisputably direct taxes, taxes on the rents or income of real estate are

equally direct taxes.

Second. We are of opinion that taxes on personal property, or on the

income of personal property, are likewise direct taxes.57

The Court’s lengthy analysis rests heavily on the substance-over-form rationale advanced

by the taxpayer that a tax on the income from property simply cannot be distinguished from a tax

on the property itself.58 After Pollock, therefore, there could be no federal income tax without an

amendment to the Constitution, and the Supreme Court’s decision in Pollock in fact led to the

Sixteenth Amendment.

It is quite clear since Pollock that a tax on the value of either real or personal property is

a direct tax. Further, a tax merely on the income from either type of property is a direct tax, but

one that is permitted by the Sixteenth Amendment. Therefore, the generation-skipping tax cannot

be valid unless it is a tax on something other than the value of the transferor’s property per se.

54

U.S. CONST. art. I, § 9, cl. 4.

55 157 U.S. 429, reh’g granted, 158 U.S. 601 (1895).

56 Pollock, 157 U.S. at 555.

57 Pollock, 158 U.S. at 637.

58 Pollock, 157 U.S. at 580-83.

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b. The Generation-Skipping Tax Will Avoid Being Considered a

Direct Tax Only to the Extent it Operates as an Excise Tax on the

Transfer of Property.

The Supreme Court often has held or stated that succession taxes, inheritance taxes, estate

taxes, and other death taxes will not be considered direct taxes on property if they are applied in a

manner that is merely an excise tax on the transfer of property at death.59

The seminal case on the matter is Knowlton v. Moore,60 in which the Court stated as

follows:

Taxes of this general character are universally deemed to relate, not to property eo nomine,

but to its passage by will or by descent in cases of intestacy, as distinguished from taxes imposed

on property, real or personal, as such, because of its ownership and possession. In other words,

the public contribution which death duties exact is predicated on the passage of property as a

result of death, as distinct from a tax on property disassociated from its transmission or receipt by

will, or as the result of intestacy.61

After considering the approach used in other nations and colonies, the Court in Knowlton

concluded that the “tax laws of this nature in all countries rest in their essence upon the principle

that death is the generating source from which the particular taxing power takes its being, and that

it is the power to transmit, or the transmission from the dead to the living, on which such taxes are

more immediately rested.”62

In United States v. Wells Fargo Bank,63 Justice Brennan’s opinion recognizes that the

estate tax, unlike the income tax, is not a direct tax but rather is an excise tax that may be levied

only upon the use or transfer of property. That opinion states:

Of course, we begin our analysis of § 5(e) with the statutory language itself. This section

states that “[Project Notes], including interest thereon, . . . shall be exempt from all taxation now

or hereafter imposed by the United States.” Well before the Housing Act was passed, an

exemption of property from all taxation had an understood meaning: the property was exempt

59 See, e.g., Scholey v. Rew, 90 U.S. (23 Wall.) 331 (1874); Knowlton v. Moore, 178 U.S. 41 (1900);

Murdock v. Ward, 178 U.S. 139 (1900); New York Trust Co. v. Eisner, 256 U.S. 345 (1921); Greiner v. Lewellyn,

258 U.S. 384 (1922); Young Men’s Christian Ass’n v. Davis, 264 U.S. 47 (1924); Chase Nat’l Bank v. United States,

278 U.S. 327 (1929); Reinecke v. Northern Trust Co., 278 U.S. 339 (1929); Tyler v. United States, 281 U.S. 497

(1930); United States v. Jacobs, 306 U.S. 363 (1939); United States Trust Co. v. Helvering, 307 U.S. 57 (1939);

Fernandez v. Wiener, 326 U.S. 340 (1946); United States v. Manufacturers Nat’l Bank of Detroit, 363 U.S. 194

(1960); United States v. Wells Fargo Bank, 485 U.S. 351 (1988).

60 Knowlton v. Moore, 178 U.S. 41 (1900).

61 Knowlton, 178 U.S. at 47.

62 Id. at 56.

63 485 U.S. 351 (1988).

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from direct taxation, but certain privileges of ownership, such as the right to transfer the property,

could be taxed. Underlying this doctrine is the distinction between an excise tax, which is levied

upon the use or transfer of property even though it might be measured by the property’s value, and

a tax levied upon the property itself. The former has historically been permitted even where the

latter has been constitutionally or statutorily forbidden. The estate tax is a form of excise tax.64

In United States v. Manufacturers Nat’l Bank,65 the Supreme Court observed that “[f]rom

its inception, the estate tax has been a tax on a class of events which Congress has chosen to label,

in the provision which actually imposes the tax, ‘the transfer of the net estate of every

decedent.’”66 In that case, the Court sought to find a transfer, reflecting the critical threshold test

of every case in which an estate tax is to be assessed: identify the transfer.

If Congress wanted to tax all property interests owned by a decedent, irrespective of the

taxes associated with any transfer that may have occurred as a result of the decedent’s death, it

could do so simply by amending IRC Sec. 102 to make bequests, devises, and inheritances subject

to the income tax. This is true because the federal income tax is a permissible direct tax on

property under the Sixteenth Amendment to the Constitution. Because income is by definition

taxed only when received, even the repeal of IRC Sec. 102 would tax only the transfer-receipt of

property. However, until a similar constitutional amendment is adopted with respect to

generation-skipping, estate and gift taxes, it is unconstitutional to assess the generation-skipping

transfer tax in a manner that constitutes an unapportioned direct tax.

Therefore, only that property which is transferred as a result of a taxpayer’s death or by

gift during the taxpayer’s life can be subjected to taxation under the federal generation-skipping

transfer tax system. The tax cannot be a “wealth tax” or “property tax” on the intrinsic value of an

asset to the decedent or donor at the time the transfer occurs; rather, it must be a tax only on the

value transferred.

IRC Sec. 2033 expansively defines a decedent’s gross estate to include all assets owned by

the decedent at the time of his death for purposes of calculating the decedent’s estate tax,

irrespective of whether all or part of those assets are to be transferred to the decedent’s heirs.

Specifically, IRC Sec. 2033 provides that “the value of the gross estate shall include the value of

all property to the extent of the interest therein of the decedent at the time of his death.”67

Although the Internal Revenue Code expansively defines a decedent’s gross estate to

include all assets owned by the decedent at the moment of his death, the U.S. Treasury through its

own regulations recognizes that in certain instances such inclusion would be unconstitutional.

The decedent’s property must not only be owned by the decedent at the moment of his death, but

64 Id. at 355.

65 363 U.S. 194 (1960).

66 Id. at 198.

67 I.R.C. § 2033.

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must also be transferable. The Treasury Regulations provide that “the estate tax . . . is an excise

tax on the transfer of property at death and is not a tax on the property transferred.”68 The

Regulations add the following helpful example of an asset of the decedent that in many cases has

significant value at the moment of death, but very little transferable value (and, thus, very little

value for estate tax purposes):

[A] cemetery lot owned by the decedent is part of his gross estate, but its

value is limited to the salable value of that part of the lot which is not designed for

the interment of the decedent and the members of his family.69

A cemetery lot could be sold for considerable value at the moment of death. However,

under the regulations that part of a cemetery lot in which the decedent is buried is not included in

the gross estate and is not subject to tax because it is not transferred to the decedent’s heirs at

death; rather, it is taken or encumbered by the decedent’s remains. The logic of the cemetery lot

exception in the Treasury Regulations is a tangible example showing that the estate tax is an

excise tax on the transfer of property at death and not a tax on the property transferred.

The following example may be even more indicative of the constitutional limitation on the

estate tax than the Treasury’s example of the cemetery lot: what would be the estate tax result if a

decedent died owning the Coca-Cola formula and directed in her will that her executor was to

retrieve the formula from her safe deposit box and burn it? What would be the value of that

formula for estate tax purposes if the executor burned the formula six months after the decedent’s

death? Is the value of the transfer equal to what a hypothetical willing buyer would pay for the

Coca-Cola formula at the moment of death or what a hypothetical willing buyer would pay for the

ashes? The answer is well stated in the Court’s opinion in Ahmanson Found. v. United States,70 in

which the Ninth Circuit opined:

[T]he valuation of property in the gross estate must take into account any

changes in value brought about by the fact of the distribution itself. It is undisputed

that the valuation must take into account changes brought about by the death of the

testator. Ordinarily death itself does not alter the value of property owned by the

decedent. However, in a few instances such as when a small business loses the

services of a valuable partner, death does change the value of property. See United

States v. Land, supra, 303 F.2d at 172. The valuation should also take into account

transformations brought about by those aspects of the estate plan, which go into

effect logically prior to the distribution of property in the gross estate to the

beneficiaries. Thus, for example, if a public figure ordered his executor to shred

and burn his papers, and then to turn the ashes over to a newspaper, the value to be

counted would be the value of the ashes, rather than the papers. Similarly, if a will

68 Treas. Reg. §20.2033-1(a).

69 Treas. Reg. §20.2033-1(b).

70 674 F.2d 761 (9th Cir. 1981) (emphasis added).

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provides that prior to the distribution of the estate a close corporation owned by the

testator is to be recapitalized, with one class of stock in the gross estate exchanged

for another, the value of the gross estate would be based on the shares resulting

from the recapitalization. Provident Nat’l Bank v. United States, supra, 581 F.2d at

1086-87.

. . . The estate tax is a tax upon a transfer. . . . [I]t is a tax on the privilege of

passing on property not a tax on the privilege of receiving property.71

It is clear that the valuation of what is transferred and subject to estate tax, in the words of

Ahmanson, takes “into account transformations. . . which go into effect logically prior to the

distribution of property in the gross estate to the beneficiaries.”72

In another Ninth Circuit case, Estate of McClatchy v. Commissioner, 147 F.3d 1089 (9th

Cir. 1998) the court also analyzed the affect changing transfer restrictions had on valuation of

stock. The decedent, prior to his death, owned two classes of common stock of a corporation, one

class of which was subject to federal securities law transfer restrictions on sales as an affiliate of

the corporation. Upon the decedent’s death, the restricted stock passed to the executor of his

estate. The executor, which was not an affiliate, was not subject to the securities law restrictions

applicable to the decedent.

The court held that the restricted stock should be valued in the hands of the decedent and

should reflect the discount applicable to the restriction on transfer of the stock. The court ruled

that death alone in this instance, did not logically alter the value of the stock. Instead, the change

in value was occasioned by the identity of the transferee (i.e., the executor) and not by death.

Thus, according to the court, the property was not transformed prior to the distribution to the heirs

of the estate by the lapsing security law restrictions. VI. USING A 20% ANNUAL INCREASING ANNUITY GRAT, AND USING

“PROPORTIONALITY” AND “DEBT” EXCEPTIONS TO IRC SEC. 2701 TO PLAN

FOR PRIVATE EQUITY FUND MANAGERS AND HEDGE FUND MANAGERS.

A. The Technique.

Private equity fund managers or hedge fund managers often participate in their funds in

two different manners. The fund manager often invests in his managed fund along with other

investors and receives the same return and rights that the other investors receive. Additionally,

the fund manager also receives a right to “carried” interest from the fund that participates in the

profits of the fund after a certain minimum amount of profits have been allocated to the investors.

Many of these mangers would like to do estate planning solely on their “carried” interest because

of its greater growth potential. However, because managers have two different types of equity

71 Id. at 768.

72 Id.

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interests in their funds, and because they are in control of the funds, many worry that the special

valuation rules of IRC Sec. 2701 may apply to any transfers of the “carried” interest and those

valuation rules may be applied in a manner that is disadvantageous in comparison to the

hypothetical willing buyer, willing seller standard that is normally applied for gift tax transfers.73

Because of that IRC Sec. 2701 concern, the creation of a Leveraged FLLC Asset GRAT,

with a certain percentage of the fund manager’s pro rata interests in the funds or his carried

interests being contributed to a GRAT, may be the estate planning vehicle of choice for a private

equity fund manager. Consider the following example:

Example 7: Iam A. Carrier Engages in Estate

Planning With Respect to His Carried Interest

Iam A. Carrier is a private equity fund manager, along with his partners of a $1 billion

private equity fund. Mr. Carrier is interested in estate planning with respect to certain of his

interests in a private equity fund in which he invests and co-manages. Mr. Carrier owns a .2%

investment interest in the $1 billion private equity fund. Mr. Carrier also has a 10% interest in

the entity that owns the general partner of the private equity fund. The general partner is entitled

to the “carried interest” as further described below.

The profits and cash flow of the private equity fund are to be divided as follows:

First, to the investment owners in proportion to their unreturned capital

contributions until all capital contribution amounts have been returned.

Second, to the investment owners until they have received an 8% return on their

unreturned capital contribution amounts. This 8% “preference” return is

cumulative and compounds annually.

Third, to the carried interest owners until they have received distributions totaling

20% of the total profits of the private equity hedge fund on a cumulative basis.

Fourth, to the carried interest owners and the investment owners so that the

carried interest owners receive 20% of the “residual” cash flow and profits and

the remaining 80% of the “residual” cash flow and profits are allocated among

the investment owners in proportion to their respective membership interests.

There are many investment reasons for Mr. Carrier to create a FLLC to hold the carried

interest before he engages in estate planning, including certain control aspects inherent with his

other co-managers.

73 See Wendel and Hatcher, How to Profit Without Getting Carried Away: Carried Interests, Profits

Interests, or Black Holes?, American College of Trust and Estate Counsel Annual Meeting ( March 4-9, 2009) and

Jonathan J. Rikoon, Fun with Funds: FUNDamentals of Estate Planning with Carried Interests in Private Equity and

Hedge Funds, 43rd

Heckerling Institute on Estate Planning (January 13, 2009) .

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Mr. Carrier has asked his attorney, Connie Careful, to develop planning ideas based on

the following assumptions about the growth of the private equity fund:

Beginning Distributed Unrealized

of Year Income Growth* End of Year

Year 1 1,000,000,000 20,000,000 101,353,392 1,101,353,392

Year 2 1,101,353,392 22,027,068 111,625,902 1,212,979,294

Year 3 1,212,979,294 24,259,586 122,939,566 1,335,918,860

Year 4 1,335,918,860 26,718,377 135,399,908 1,471,318,768

Year 5 1,471,318,768 29,426,375 149,123,148 1,620,441,915

Year 6 1,620,441,915 32,408,838 164,237,285 1,784,679,200

Year 7 1,784,679,200 35,693,584 180,883,290 1,965,562,490

Year 8 1,965,562,490 39,311,250 199,216,425 2,164,778,916

Mr. Carrier would like Ms. Careful to concentrate on the estate planning opportunities

inherent with his carried interest. It is assumed that if Mr. Carrier is a hypothetical willing seller,

a hypothetical willing buyer would pay $1,500,000 for his interest in the entity that owns the

general partnership carried interest. Mr. Carrier generally wishes to retain (free of estate

planning techniques) most of the preference economics associated with his investment interest in

the private equity fund for his consumption needs.

Ms. Careful is worried about the gift tax valuation rules of IRC Sec. 2701 applying, if the

estate plan is isolated on solely planning for the carried interest. Ms. Careful reasons that the

carried interest will only be profitable if the private equity fund earns over 8%. Thus, if she

devises a plan that uses the proportionality and debt exceptions to the application rules of the IRC

Sec. 2701 valuation rules (assuming interest on the debt will be equal to or less than 8%), she

believes she may be able to simulate (and even improve) any potential estate planning

opportunities in comparison to an isolated plan involving the carried interest.

Ms. Careful believes that Mr. Carrier should contribute the same proportion of his

ownership in the carried interest and his investment interest in the private equity fund to a FLP or

FLLC. For his contribution, Mr. Carrier could receive a combination of equity interests and

notes in that family entity with the face amount of the notes being equal to the value of the

contributed investment interest in the fund.

Ms. Careful believes she would then be in a position to plan for Mr. Carrier’s estate,

without the investment interest “diluting” the planning opportunity for the carried interest. More

specifically, Ms. Careful believes that if Mr. Carrier receives a note from the family holding entity

that is equal to the value of the investment interest in the private equity fund contribution, there

will be no dilution in her planning for the carried interest contribution to the family holding

entity.

SSE01WM -68-

1a”):

The initial Holdco structure would be organized as follows (“Hypothetical Technique

Scenario 1: Hypothetical Technique 1a

Ms. Careful believes that because of certain income tax considerations it may be prudent

to use a GRAT instead of a sale to an intentionally defective grantor trust or some other estate

planning technique that could be considered as involving a disposition of the carried interest.

Ms. Careful may also wish to eliminate from Mr. Carrier’s planning any carried interest that has

been awarded in the last two years, because of those income tax considerations.74 Thus, she

suggests to Iam A. Carrier that he transfer his 99% non-managing member interest in Holdco to an

eight year near “zeroed out” GRAT in which the annuity increases 20% a year. The estate

planning structure is illustrated below (“Hypothetical Technique 1b”):

74 Receipt of a carried interest in exchange for services provided to the managed fund held in partnership

form by a fund manager is generally not a taxable event regardless of whether it is vested upon receipt, subject to

compliance with Rev. Proc. 93-27, 1933-2 CB 343, and 2001-43, 2001-2 CB 191. One of the requirements for the no

income tax treatment provided for in Rev. Proc. 93-27 is that the recipient partner not dispose of the carried interest or

any other profits interest within two years of receipt. A gift to a GRAT that is a grantor trust for income tax purposes

should not be considered a disposition because there is no sale either for income tax purposes or property law

purposes. If Family Holdco FLLC is carefully constructed in stages, the contribution of the Private Equity Fund

Carried Interest may also not be considered a sale for income tax purposes or property law purposes. For instance, the

first stage could be the contribution of the carried interests in consideration for member interests in a FLLC. The

second stage could be a contribution of cash and investment interests in the fund for notes. A sale to an intentionally

defective trust should not be considered a disposition for income tax purposes, but may be considered a disposition for

property law purposes, which may be fatal under Rev. Proc. 93-27. See also Diamond v. Commissioner, 492 F.2d 286

(7th

Cir. 1974) where the receipt of profits interest was taxable because it was disposed of shortly after receipt. In

order to avoid income tax problems associated with a sale of a profits interest, in addition to tracing profit interest

contributions to the FLLC for equity interests in the FLLC, it may also be prudent, if the Leveraged FLLC Asset

GRAT technique is to be used, to only contribute carried interests that have at least two years of age, or to use

preferred member interests instead of debt in the creation of the leveraged FLLC.

SSE01WM -69-

Scenario 1: Hypothetical Technique 1b

An alternative structure, which may be subject to the valuation rules under IRC Sec. 2701,

would be for Iam Carrier to contribute $1,000,000 along with the carried interest to Holdco.

Iam A. Carrier would continue to individually own the investment interest in the private equity

fund. The structure would be similar to the illustration below (“Hypothetical Technique 1c”):

Scenario 2: Hypothetical Technique 1c

SSE01WM -70-

Iam A. Carrier could transfer his 99% non-managing member interest in Holdco to an

eight year near “zeroed out” GRAT in which the annuity increases 20% a year. The estate

planning structure is illustrated below (“Hypothetical Technique 1d”):

Scenario 2: Hypothetical Technique 1d

Under the assumptions of this example, the estate planning results of scenario one and

scenario two in comparison to each other and in comparison to no further planning are delineated

below (see attached Schedule 5):

Table 6

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B. Observations. Using two of the exceptions to the valuation rules of IRC Sec. 2701, (i) the proportionality

exception (client contributes all of his interests (both his investment interest and his carried

interest) in the private equity fund to the Holding FLP) and (ii) the debt exception (the investment

interest is contributed in exchange for a note), in combination with a 20% annual increasing

annuity GRAT, the results attained are similar to or enhanced over the results of contributing a

partnership that solely owns a carried interest to a 20% annual increasing annuity GRAT, without

the IRC Sec. 2701 valuation concerns. VII. LIFETIME CHARITABLE GIVING STRATEGIES THAT ALSO BENEFIT CLIENT’S

DESCENDANTS IF USED WITH A LEVERAGED FLLC ASSET GRAT.

A. Use of a Leveraged FLLC Asset GRAT When One of the Assets of the FLLC is a

Non-charitable Interest in a Charitable Remainder Unitrust (“CRUT”).

1. Introduction and the Technique.

The “conventional wisdom” this author sometimes hears on this subject is as follows:

“you can no longer use the CRUT technique and benefit your family;” or “the problem with

charitable planning is that it will greatly decrease what a client’s family will receive.” This

“conventional wisdom,” under the circumstances discussed below, is incorrect.

Charitable remainder trusts, particularly charitable remainder unitrusts (“CRUTs”) are a

very popular planning technique for the charitably inclined client. While the technique has

significant benefits to the client and his favorite charitable causes, one downside is the perception

that it is difficult to benefit a client’s family with the technique. Perhaps that is not true, if the

technique is used synergistically with certain other estate planning techniques, that is, a Leveraged

FLLC Asset GRAT. That synergistic planning could simulate the following: a capital gains tax

and estate tax holiday with the only cost (or additional benefit) being that the taxpayer’s favorite

charity receives a little over 20% of his remaining wealth on his death.

Consider the following example:

Example 8: Charlie Charitable Wishes to Benefit His Family,

His Charitable Causes and Himself With a Monetization Strategy

Charlie Charitable, age 63, is widowed and has three adult children. Charlie owns $10

million of a publicly traded stock with a zero basis. Charlie also owns $2,500,000 in financial

assets that have a 100% basis. He plans to spend $150,000 per year, indexed for inflation. If

Charlie’s spending needs are secure, he would like to give a large proportion of his after-tax

wealth to his family, but he would still like to give between 20% and 25% of what he owns to his

favorite charity. Charlie wants to diversify his stock position, but does not want to incur a big

capital gains tax. Charlie has considered a CRUT, but he is concerned that charity could receive

a windfall at the expense of his family if he dies prematurely. He is not certain he will qualify for

favorable life insurance rates to insure against that risk and he generally dislikes insurance as a

pure investment vehicle. Charlie would like his family to be eligible to receive some funds now,

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but he does not want to bear the gift tax consequences of naming family members as current

CRUT beneficiaries. Charlie is also willing to take steps to reduce potential estate tax, and he

needs help sorting through his options. He would like to involve his children in his estate

planning discussions so they can learn about their obligations as fiduciaries and beneficiaries

and can start to plan their own family and financial affairs.

Charlie's lawyer, Pam Planner, has a plan to help Charlie achieve his objectives, which

significantly reduces the capital gains tax on the sale of his appreciated stock and minimizes the

estate tax cost of transferring the stock proceeds to his family. Pam suggests that Charlie fund a

Charitable FLLC with his stock, and that the FLLC creates a twenty-year term charitable

remainder unitrust (“CRUT”). The FLLC will keep an up-front stream of payments for twenty

years that represents a 90% actuarial interest in the CRUT. Charlie’s favorite charity will receive

the remaining CRUT assets at the end of the twenty-year term. The trustee of the CRUT could sell

the stock and construct a diversified investment portfolio without triggering immediate capital

gains tax consequences. If Charlie owns most of the Charitable FLLC when the CRUT is created,

most of the income tax charitable deduction for charity’s 10% actuarial interest will flow through

to him. Charlie could then contribute his non-managing member interest in the Charitable FLLC

along with most of his other financial assets to a leveraged FLLC (Financial FLLC) getting a note

back for 90% of the value of the assets. Charlie can allocate GST exemption to the grantor trust so

his family’s wealth is potentially protected from gift, estate and GST taxes forever.

This technique is illustrated below:

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A CRUT is an irrevocable trust, often called a “split interest” trust. When a donor creates

a CRUT, he can keep or give away a continuing payment stream from the CRUT for a period of

time. This payment stream is made to the “noncharitable” beneficiaries.75 The time period can

last for up to twenty years or for the lifetimes of one or more currently living noncharitable

beneficiaries.76 In private letter rulings, the IRS has permitted partnerships and corporations to

create CRUTs where the unitrust term is measured in years instead of the lives of individuals.77 In

Charlie’s case, the FLLC will be both the donor and the noncharitable beneficiary. The CRUT

must pay a fixed percentage of the annual value of its assets to the FLLC each year, so the unitrust

payments will fluctuate along with the value of the CRUT’s investments.

At the end of the unitrust period, the trustees of the CRUT will distribute the remaining

assets to one or more qualified charitable beneficiaries or will hold the assets solely for charitable

purposes.78 These charitable beneficiaries can include private foundations and donor advised

funds.79

The FLLC, as the donor, will pass through a current income tax deduction for the value of

charity’s interest to the members in the year it funds the CRUT. The value of the deduction

depends on the value of the assets contributed to the CRUT, how long charity must wait to receive

its interest, the size and timing of the partnership’s reserved unitrust payment, and an assumed

investment rate of return (called the IRC Sec. 7520 rate) that the IRS publishes monthly.80

Because Charlie will own almost all of the FLLC when the CRUT is created, he will receive most

of the deduction. Generally, Charlie can deduct up to 30% of his adjusted gross income for the

75 IRC Sec. 644(d)(2)(A); Treas. Reg. §1.664-3(a)(1).

76 Treas. Reg. §1.664-2(a)(1).

77 See P.L.R. 9205031 (Jan. 31, 1992) (C corporation); P.L.R. 9340043 (S corporation); P.L.R. 9419021

(Feb. 10, 1994) (partnership). Under Treas. Reg. §1.671-2(e)(4), if a partnership or corporation (an “entity”) makes

a gratuitous transfer to a trust for a business purpose, the entity is generally treated as the grantor of the trust.

However, if an entity makes a gratuitous transfer to a trust for the personal purposes of one or more partners or

shareholders, the gratuitous transfer is treated as a constructive distribution to the partners or shareholders and they in

turn are treated as the grantors of the trust. The IRS has taken the position that a CRT with multiple grantors is an

association taxable as a corporation. See P.L.R. 9547004 (Nov. 24, 1995); P.L.R. 200203034 (Jan. 18, 2002). If the

IRS takes the position that Charlie’s partnership created the CRUT all or in part for the personal purposes of its

partners, then the CRUT may not be valid. If a practitioner is concerned about this result, Charlie could accomplish

the transaction by funding a single member FLLC, having the FLLC create the CRUT, and then selling a portion of the

FLLC to a grantor trust so that there is only one grantor and income tax owner for the entire series of transactions.

78 IRC Sec. 664(d)(2)(C).

79 Qualified organizations are described in IRC Secs. 170(c), 2055(a), and 2522(a).

80 The IRC Sec. 7520 rate is 120% of the federal midterm rate. The partnership can choose the rate in effect

for the month of the gift or for either of the two immediately preceding months.

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transfer of appreciated marketable securities to the CRUT (20% if the remainderman is a private

foundation), and he can carry forward any excess deduction for five years.81

Pam lists some of the key CRUT rules for Charlie:

a. The FLLC, as the noncharitable beneficiary, must receive an annual

unitrust payment.82 This unitrust payment is a fixed percentage of the fair

market value of the trust’s assets, revalued annually. There are exceptions

to this rule that allow some CRUTs to distribute net income instead, but

these extra rules are not relevant for Charlie.

b. The unitrust payment must be at least 5%,83 but not more than 50%,84 of the

fair market value of the trust’s assets, determined annually.

c. At the CRUT’s inception, the actuarial value of charity’s interest in the

CRUT must be worth at least 10%.85 The CRUT can receive additional

contributions as long as each additional contribution satisfies the 10%

rule.86

d. The CRUT does not pay income taxes.87 The CRUT distributions carry out

income tax consequences to the noncharitable beneficiary in a specific

order: First, as ordinary income to the extent of the trust’s current and past

undistributed ordinary income (dividends that are taxed at 15% are

included in this tier); second, as capital gains to the extent of the trust’s

current and past capital gains; third, as tax-exempt income to the extent of

the trust’s current and past tax exempt income; and finally, as a nontaxable

return of capital.88

81

IRC Sec. 170(b)(1)(B), (b)(1)(D). If a private foundation were the named remainderman and the stock of

XYZ Company were not publicly traded, the deduction would be limited to basis (here, zero), and could not exceed

10% of XYZ Company’s stock. IRC Sec. 170(e)(1)(b)(ii), (e)(5)(C).

82 IRC Secs. 664(d)(1)(B), (2)(B); Treas. Reg. §1.664-3(a)(1)(i).

83 Treas. Reg. §1.644-2(a).

84 IRC Sec. 664(d)(1)(A), as amended by The Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat.

787 (1997).

85 IRC Sec. 664(d)(1)(D).

86 Treas. Reg. §1.664-3(b).

87 IRC Sec. 664(c)(1). Charlie’s advisors will also want to ascertain the tax treatment of the CRUT under

applicable state law. Most states recognize CRUTs as tax exempt, but some, e.g., New Jersey, do not. It will usually

be possible to establish the partnership and CRUT in a state recognizing the exemption regardless of where Charlie

lives.

88 IRC Sec. 664(b); Treas. Reg. §1.664-1(d)(1).

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a. Charlie must factor in additional legal, accounting and administrative

costs. Since every unitrust payment depends on an annual valuation of the

CRUT’s assets, hard to value assets might generate appraisal costs, too.89

b. The trustees of the CRUT do not have unlimited investment flexibility.

There is a 100% excise tax on unrelated business taxable income (UBTI)

generated in a CRUT. Broadly defined, UBTI is income derived from any

trade or business. UBTI includes debt-financed income, so certain

investment strategies that use borrowing might be off limits. Also, the

self-dealing rules that apply to charitable trusts prohibit Charlie from

transacting with the CRUT, even if the transaction is completely fair.90

Charlie is interested in Pam’s idea but it seems complicated, so he wonders if the plan is

really that much better than just selling his stock. He also wonders how much taxation truly

affects the real wealth he can transfer to his family over time. Charlie has already created a

successful intentionally defective GST exempt trust so he has been through the planning process

before. Still, he is eager to get a lucid explanation of some planning techniques to start educating

his children and he wants to understand how the techniques can be combined to achieve his

objectives.

2. Advantages of the Technique.

a. The Tax Advantages of Creating a Leveraged FLLC Asset GRAT.

See the discussion in Section III B of this paper.

b. The Tax Advantage of Eliminating the Capital Gains Tax on That

Part of the Gains That Will Be Allocated to the Charity Under the

Tiered Income Tax Rules.

Depending upon the investment performance of the assets held in the CRUT a portion of

the built-in capital gains will be allocated to the charity under the tiered income allocation rules.

Treas. Reg. §1.664-1(d)(1). Assuming a 6% to 8% annual return of the CRUT assets during the

20 year term of the CRUT 40% to 60% of the original built-in gain will be allocated to the charity

on termination of the CRUT and that portion of the gain will not be taxed when the asset is sold in

year one.

89 Treas. Reg. §1.664-1(a)(7).

90 IRC Sec. 4941.

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c. The Tax Advantage of Lowering Opportunity Costs By Delaying

Taxes on the Portion of the Original Gain That is Not Allocated to

Charity.

If tax rates stay the same, it is better for Charlie to defer paying taxes so he can use those

tax dollars to generate investment returns. Paying taxes earlier than necessary is an opportunity

cost.

d. The Tax Advantage of a Charitable Deduction in Year One For the

Actuarial Value of the Remainder Interest of the CRUT Passing to

Charity.

Under the facts of this example, Charlie will receive an income tax deduction equal to

10% of the value of the CRUT assets. The benefits of that tax deduction occur in year one.

e. The Tax Advantage of Integration, Which Produces Advantageous

Comparative Results.

Charlie can use a combination of gift and estate planning techniques to achieve his

objectives. But the plan also requires investment strategies that support the income tax, cash flow

and appreciation targets necessary to promote its success.

Charlie, his children and the trustees then show the plan to their investment advisor. The

advisor constructs a sample diversified portfolio inside the CRUT that targets an annual 7.4%

pre-tax return, with 3% of the return being taxed at ordinary income or short term gains and the

balance 4.4% of the return being taxed at long term capital gains rates. Generally, the advisor

projects an annual 30% turnover – that is, on average the trust will need to sell and reinvest 30%

of the portfolio every year. It is assumed that the total taxes on realized long-term capital gains

(including income taxes, surtax on investment income and the so-called “stealth” tax), will be

25%. It is also assumed that total taxes on ordinary income will be 44.6% (including income

taxes, surtax on investment income and the so-called “stealth” tax).

Charlie, the children, the trustees and their investment advisor consider how to produce

the annual CRUT payments; how much could be in cash and in kind; what happens when the

CRUT distributes its unitrust payments to the Charitable FLLC and the Charitable FLLC

distributes some or all of the unitrust payments to Financial FLLC; Financial FLLC’s repayments

of Charlie’s note; and how to reinvest those distributions to meet the differing objectives for

Charlie, the charity, Financial FLLC and the grantor trust that is the remaindermen of the GRAT.

They think through contingency plans to cope with inevitable investment volatility, or the ups and

downs that happen in every diversified investment plan. They analyze the different types of note:

a “slow” note that preserves leverage for a longer time, and a “fast” note that eliminates the

uncertain tax issues at Charlie’s death. Charlie decides he would like the trust to repay his note as

soon as possible, so the repayment is built into the plan.

To show Charlie the difference that taxes play in accumulating family wealth over time,

Pam projects what would happen if there were no initial capital gains taxes when Charlie sells his

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stock and no estate taxes. She also projects what would happen if Charlie contributed non-

managing member interests in Charitable FLLC to Financial FLLC without including the CRUT

component. If the investment plan produced smooth returns until Charlie’s death (which the

group agrees to project twenty-five into the future), the results would look like this (see

Schedule 6):

Table 7

Using the above assumptions, Charlie will not pay tax on approximately half of the capital

gains generated when the CRUT sells the stock. Under the CRUT tiered income distribution

rules, approximately half the gain will still be inside the CRUT at the end of twenty years when

charity receives the remainder. Although Charlie does pay some capital gains tax on the other half

of the gain, he still takes advantage of two of Pam’s key concepts: He defers the capital gains tax

payment until the CRUT makes distributions, and his estate does not pay estate tax on those

capital gains tax payments. In effect, the grantor trust repays Charlie’s installment note using

pre-tax dollars.

Charlie is currently subject to a combined federal and state transfer tax rate of 44.6%. On

the one-half of the capital gains taxed to Charlie (because the rest of the capital gain is still

embedded in the CRUT when it passes to charity), Charlie avoids transfer tax on the dollars he

spends to pay capital gains tax. Charlie has already paid those dollars to the IRS and so they have

been eliminated from his transfer tax base. That means Charlie’s total effective capital gains rate

on his $10,000,000 stock sale turns out to be less than 7.5% instead of 25% (prior to considering

the 4.46% charitable income tax subsidy and the “time” described below). In other words, it costs

Charlie a net of 3% of the proceeds in taxes to sell the stock using the proposed technique instead

of 25%, even before the time advantage of delaying the payment of the capital gains tax is

considered.

Although the simple stock sale generates the lowest amount of income tax – $11,792,247

– the combined total income tax cost of combining income tax with the lost opportunity cost of

paying the capital gains tax in year one is $35,555,975, which is dramatically more than in the

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next two sets of projections (the simulated tax holiday and Pam’s CRUT plan) because the early

stock sale tax payment contributes to $23,763,728 in investment opportunity costs. Since Charlie

pays capital gains tax immediately on the stock sale, his family loses the benefit of reinvesting

those tax dollars. On top of that, the simple stock sale without estate planning piles on another

$6,610,574 of estate tax. In contrast, there is no estate tax liability at all in the next three

projections.

Because Charlie will own more than 99% of the FLLC when the FLLC funds the CRUT,

the FLLC will pass through more than 99% of the charitable income tax deduction to Charlie. The

deduction equals 10% of the fair market value of the assets contributed to the CRUT, or

$1,000,000. In Charlie’s case, it is assumed the deduction offsets $1,000,000 of his ordinary

income, so it yields a $446,000 income tax benefit. In effect, the income tax deduction pays

Charlie a 4.46% subsidy for his $10,000,000 transaction.

The two middle rows of numbers compare Pam’s plan to a simulated tax holiday. Both

sets of projections shows a total tax burden (which includes the investment opportunity costs of

paying the tax) that is less than 65% of the aggregate tax bill generated by the simple stock sale

with no planning. Charlie detects only one difference between Pam’s plan and the simulated tax

holiday. In Pam’s plan, the total projected tax cost is an additional $2,278,958 (or 8.4% of the

roughly $27,121,384 tax burden in the simulated tax holiday). That $2,278,958 reduces what

Charlie’s family would keep in a world with no initial capital gains tax on big stock sales and no

estate taxes.

Pam asks Charlie to consider the projected outcome if he contributes non-managing

member interests in Charitable FLLC to a Leveraged FLLC Asset GRAT, but the FLLC does not

transfer its appreciated securities to a CRUT first. Those projections are in the final row. Charlie

sees that his descendants would end up with $25,552,526, if Charitable FLLC did not create the

CRUT, or $579,837 more than they would have received, if the FLLC did create the CRUT. Pam

explains that when the FLLC creates the CRUT, the trustees do not pay immediate capital gains

tax when they sell the stock, and Charlie receives a charitable income tax deduction up front.

Without the CRUT, the larger note from the contribution to the Leveraged FLLC Asset GRAT,

the early payment of taxes and lack of income tax subsidy compounds over time, so that at the end

of the day, Charlie’s family pays additional taxes and opportunity costs that cost almost as much

as the future $7,539,379 gift to charity. Thus, there is comparatively little net cost to Charlie’s

family to transfer around $7,539,379 to charity. In fact, in states where a state capital gains tax

exists, the net worth of Charlie’s family generally increases with the use of the CRUT technique.

Although Charlie clearly sees that the two middle rows of numbers – Pam’s plan against a

simulated tax holiday – produce a nearly identical result, Pam presses the benefits of

understanding leverage and opportunity costs even further. If Charlie allocates $617,087 in GST

exemption to the GRAT on its creation (assume Charlie is 60 years old), he will protect more from

further transfer taxes by the time of his death. Please see the discussion in Section V B of this

paper. This benefit compounds as the property moves down the generations. By using his GST

exemption wisely, Charlie not only solves some of his tax problems, but he also solves some of

his descendants’ tax problems as well.

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3. Considerations of the Technique.

a. Generally, For Investments That Are Made Inside the CRUT

Should Be Marketable Stocks and Bonds. A Trustee of a CRUT

Should Avoid Any Investments That May Have Unrelated

Business Taxable Income.

b. The Technique Will Have the Same Considerations as the Creation

of a Leveraged FLLC Asset GRAT.

Please see Section III C of this paper.

B. Creating a FLP or FLLC with Preferred and Growth Interests, Transferring the

Preferred Interest to a Public Charity, and Transferring the Growth Interests to a

Leveraged FLLC Asset GRAT.

1. The Technique.

There could be significant after-tax cash flow advantages for giving preferred interests in a

FLLC that is designed to last for several years to a public charity, or a donor advised fund, and

transferring the growth interests to a taxpayer’s family.

Consider the following example.

Example 9: Gift of a Preferred FLLC Interest to a Public Charity

and the Gift or Sale of a Growth FLLC Interest to a Taxpayer’s Family

George Generous is unhappy about some of tax limitations associated with traditional

charitable giving. Not only do tax limitations exist with respect to the amount of a deduction

available for income tax purposes, there also is not any deduction in determining the new

healthcare tax. George’s stewardship goals are to give around $420,000 a year to his favorite

public charities and to give a $6,000,000 bequest to his favorite public charities in his will

George tells Pam that he has a $6,000,000 zero basis security in his $22,000,000

portfolio. George asks Pam to assume his assets will annually earn 7.4%, with 3% of that return

being taxed as ordinary rates and 4.4% of the return being taxed at long-term capital gains rates

with a 30% turnover. George believes he has a 20-year life expectancy. George has a significant

pension plan that pays for his consumption needs.

George asks his lawyer, Pam Planner, if she has any ideas that are consistent with his

charitable intent where he can get a tax deduction for his projected annual giving without any

limitations, both for determining his income tax and the new healthcare tax. He also asks Pam if

she has any ideas of how he can get an income tax deduction this year for the actuarial value of

the planned testamentary gifts he wishes to make to his favorite charitable causes. George also

would like to hear Pam’s best ideas on how to avoid the capital gains tax and healthcare tax on

the projected $6,000,000 sale of some his highly appreciated securities.

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Pam Planner suggests that George consider forming a FLLC that will last until the earlier

of his death, or 50 years. The FLLC is structured to have both preferred and growth interests.

George could contribute $22,000,000 of his assets to the FLLC. George could contribute his low

basis securities to the FLLC and receive a $6,000,000 preferred interest that pays a coupon of 7%

(or $420,000 a year). The rest of his member interests, the so-called “growth” interests, would

receive any income or gains above what is necessary to fund the preferred coupon.

After the FLLC is formed, Pam suggests that George make a gift of the preferred FLLC

member interest to his favorite charity, the Doing Good Donor Advised Fund (which is a donor

advised fund at a local community foundation and is a qualified public charity). The Doing Good

Donor Advised Fund is entitled to a 7% preferred coupon each year. George could gift and sell

the growth interests to a trust for his family.

This technique is illustrated below:

2. Advantages of the Technique.

a. The Donor May Receive an Income Tax Deduction For the

Discounted Present Value of the Charity’s Right to Receive the Par

Value of the Preferred on Termination of the FLLC, Even Though

That Might Occur After the Donor’s Death.

George may receive a full deduction for the present value of the right to receive the par

value of the preferred interest when the FLLC terminates, even though no cash has passed from

his hands to the donor advised fund and the payment of the preferred par value will probably occur

after George’s death. Contrast that treatment with a bequest of a dollar amount under George’s

will. Obviously, George will not receive a lifetime income tax deduction for that bequest.

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b. The Donor Should Receive an Income Tax Charitable Deduction,

in the Year of the Gift, For the Discounted Present Value of the 7%

Coupon That is to Be Paid to Charity.

Most of the value of the preferred interest is attributable to receiving the 7% coupon for 50

years, or until George’s death. Stated differently, there is no willing buyer who would pay more

than a small amount for the right to receive the par value for the preferred interest on George’s

death and the reason the preferred interest will have a fair market value of $6,000,000 is because

of the right to receive a $420,000 annual preferred coupon.

c. In Addition to Receiving an Upfront Charitable Income Deduction

For the Present Value of the Annual Coupon of the Preferred That

is Paid to the Charity, the Donor Also Receives an Indirect Second

Annual Deduction With Respect to the Future Preferred Coupon

Payments Against His Income and Health Care Because of the

Partnership Tax Accounting Rules.

The preferred interest income that is allocated to the donor advised fund will not be taxed

to the other FLLC members because of operation of IRC Sec. 704(b). George will receive each

year, in effect, a simulated income tax and healthcare tax deduction for the preferred interest

coupon income that is allocated to the donor advised fund (since he will not be taxed on that

income). That simulated deduction will not count against his adjusted gross income limitation,

and it will not be subject to limitations associated with itemized deductions.

Contrast the double income tax benefit of the charitable gift of the preferred interest

coupon with a charitable lead trust in which the donor may either receive a deduction for the

actuarial value of the lead interest payable to the charity, or not be taxed on the annual lead

payments allocated to the charity, but cannot have both income tax advantages.

d. The Donor Will Also Avoid the Built-in Capital Gains Tax on the

Sale of Any Low Basis Asset That is Contributed For the Preferred

Interest.

In this example, George receives his preferred interest in exchange for a transfer of his low

basis assets. If the FLLC sells those contributed low basis assets, George should not be liable on

any capital gains tax associated with the built-in gain that existed at the time of the contribution,

because the gain under IRC Sec. 704(c) should be allocated to the donee, the donor advised fund.

Again, contrast that result with a non-grantor charitable lead trust. If highly appreciated

assets are sold by a non-grantor charitable lead trust, the gain will be allocated to the trust. The

trust will only receive a deduction for the distributions that are made that year to charity. Thus, in

many situations with the use of the non-grantor charitable lead trust, if there are substantial capital

gains because of a sale of appreciated assets owed by the trust, that trust will pay a significant

capital gains tax.

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If instead of a non-grantor charitable lead trust, a “grantor” charitable lead trust is used, the

income that results are again disadvantageous. There will not be any allocation of the capital

gains to the charitable beneficiary. All of the taxable gain will be allocated to the grantor.

e. Assuming a Low Basis Asset Will Be Sold, the “Out of Pocket”

Cost of a Gift of a Preferred Interest to a Public Charity, or Donor

Advised Fund, is Minimal Because of the Above Tax Advantages.

George asked Pam to compare the benefits of the proposed gift of a preferred FLLC

interest with a 7% coupon to making annual cash charitable contributions equal to that 7% coupon

and a cash testamentary bequest equal to the par value of the preferred to the donor advised fund at

George’s death. Additionally, George asked Pam to assume that he will live 20 years, and that if

he elects to contribute the preferred interest to charity, the charity’s preferred interest will be

liquidated at his death.

In order to isolate the benefits of each of the annual giving strategies, Pam assumes

George’s assets will earn 7% before taxes. George asks Pam to assume 3% of the return will be

taxed at ordinary rates and 4% will be taxed at capital gains rates (with 30% annual turnover).

Using those assumptions she then calculates the income and health care tax efficiency ratio

(present value of both total net income and healthcare tax savings divided by the present value of

the total out of pocket cash) under the two assumed scenarios. Pam assumes a 7% present value

discount rate. Please see Table 8 below and attached Schedule 7.

Table 8

f. Valuation Advantage: The Gift Tax Valuation Rules Under IRC

Sec. 2701 Do Not Apply to Any Future Gifts, or Sales, of the

Growth Member Interests to Family Members, or Trusts For

Family Members.

IRC Sec. 2701 became effective on October 9, 1990. It is a gift tax valuation statute that

applies when a junior equity in a corporation or partnership is transferred to a member of the

transferor’s family and a senior interest in the family or partnership with certain discretionary

features is retained by the transferor or an ‘applicable family member.” A liquidation, put, call, or

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conversion right is automatically regarded as discretionary because it is within the discretion of

the holder. Distribution rights trigger the valuation rules of IRC Sec. 2701 if the transferors hold

control of the entity. These discretionary interests are referred to under IRC Sec. 2701 as

“applicable retained interests.”

IRC Sec 2701 prescribes special valuation rules for the value of certain senior equity

interests in a family entity (e.g., preferred interests) for gift tax purposes that are retained by the

transferor, and that value is subtracted from total value of the entity. Distribution rights are

valued according to their terms if distributions are paid periodically at a fixed rate (under IRC Sec.

2701 they are called “qualified payment”). A transferor may elect to treat distribution rights as

“qualified payments” even if they are not by assuming payments in such amounts and at such

times as are specified in the election, as long as those terms are consistent with the underlying

equity interest. The regulations provide that the right to share in the liquidation proceeds

(“liquidation participation right”) may be valued without regards to IRC Sec. 2701.

The regulations spell out in detail the methodology of subtracting the value of preferred

interests from the value of the entire entity with adjustments to reflect the actual fragmented

ownership. After the adjustments of the four step method, which takes the lack of marketability

and the likelihood of liquidation into account, the value of any transferred junior equity interests

are determined. It should be noted that there is a mandated value that the junior equity interest in

the entity cannot be worth less than 10% of the total value of the equity interests in the entity.

There is an adjustment under the regulations to prevent double transfer taxation of the

retained senior equity interests. There is a reduction of the transferor’s adjusted taxable gifts for

estate tax purposes, equal to the lesser of the amount by which IRC Sec. 2701 originally increased

taxable gifts or the amount by which the applicable retained interest increases the gross estate or

taxable gifts at the time of the subsequent transfer.

Do these IRC Sec. 2701 valuation rules apply to a transfer of a preferred interest to a

charity and a later sale or gift of the growth interest to the transferor’s family? Stated differently,

if a patriarch or matriarch reorganized his or her entity and transferred a high-yielding preferred

equity interest to a charity, would this transfer and reorganization be a transaction that is subject to

the valuation rules under IRC Sec. 2701, which was passed as part of Chapter 14? The answer is

no.91

If a retained distribution right exists, there must exist a senior equity interest (i.e., the

transferor must have retained preferred stock or, in the case of a partnership, a partnership interest

under which the rights as to income and capital are senior to the rights of all other classes of equity

interest).92 The Senate legislative history of Chapter 14 indicates that retention of common stock,

after the gift of preferred stock, is not a transaction which is subject to the valuation rules under

91 See IRC Sec. 2701(c)(1)(B)(i).

92 See IRC Secs. 2701(c)(1)(B)(i); 2701(a)(4)(B); Treas. Reg. §25.2701-2(b)(3)(i); see also P.L.R. 9204016

(Oct. 24, 1991).

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IRC Sec. 2701 because retained ownership of the common stock generally does not give the

transferor the right to manipulate the value of the transferred interest. Any transferred preferred

stock that has a cumulative right to a dividend, or any transferred note in a corporation which has

a cumulative right to interest, is not subject to value manipulation by the common stock owner.

For instance, if a dividend or an interest payment is missed, the preferred stock owner or

bondholder, as the case may be, continues to have the right to that dividend payment or interest

payment. It is true that in certain instruments the preferred stockholder would not enjoy the

compounding effect of receiving a late dividend. However, the “lowering” of value to a

transferee, by not paying the transferee’s dividend, or delaying the payment of the dividend, does

not hurt the fisc since that tends to help or increase the junior equity interest owner’s net worth

(i.e., it increases the transferor’s net worth). Thus, even though a transferee may receive a

valuable asset in a junk bond or a junk preferred interest, it is a type of security in which the junior

equity interest cannot manipulate value, except to decrease the value of the transferred interest at

a later date.

g. Under the Facts of This Example, in Addition to Saving Significant

Income and Healthcare Taxes, Significant Transfer Taxes Could

Be Saved in Transferring the Growth Interests to a Grantor Trust.

If George was able to obtain a 35% valuation discount for the growth interest in Generous

FLLC and a 20% discount for Financial FLLC, Pam projects that in addition to saving income and

healthcare taxes, George could save over $15,000,000 in estate taxes. Please see the table below

and attached Schedule 7.

Table 9

h. Income Tax Valuation Advantage: IRS Concedes Preferred

Partnership Interests Should Have a High Coupon.

Prior to passage of IRC Sec. 2036(c) in 1987 (which was repealed in 1990) and prior to the

passage of IRC Sec. 2701 as part of Chapter 14 in 1990, the IRS did not have many tools with

which to fight, from their perspective, abusive estate freezes, except valuation principles. In

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1983, the IRS issued a Revenue Ruling,93 which promulgated the factors for determining what an

appropriate coupon should be on preferred stock of a closely held corporation or what an

appropriate coupon should be on a preferred partnership interest in a closely held FLP. Generally,

the IRS took the view that a secondary market does not exist for interests in FLPs. Accordingly,

with respect to a preferred partnership interest in a FLP, the coupon should be very high in order to

reflect the embedded marketability discount of the preferred partnership interest. In other words,

according to the IRS, to have a preferred partnership interest valued at “par”, a hypothetical

willing buyer would demand a significant return on that preferred partnership interest, in

comparison to other comparable fixed income instruments, in order to compensate that

hypothetical willing buyer for the lack of marketability that would be inherent in that family

limited preferred partnership interest.

i. IRC Sec. 2036 Advantage, if George Gives or Sells the Growth

Interests to His Family.

If the growth member interest is transferred to the donor’s family after the preferred

member interest is transferred to a public charity IRC Sec. 2036 should not operate to include the

transferred common interest (or the underlying partnership assets) in the transferor’s gross estate,

for two reasons.

First, there is a substantial investment purpose (i.e., non-tax purpose) with having

preferred and common interests that divide the economic return of the FLP or FLLC between the

owners of the interests in a different way than would result without the two interests. This creates

is a substantive investment reason for the creation of the FLP or FLLC. As such, it should

constitute a significant non-tax purpose, one that is inherent in the preferred/common structure.

This in turn should minimize the danger of IRC Sec. 2036 being applied to any transfers of

interests in the FLP or FLLC, because the Tax Court and the Courts of Appeal are much less likely

to apply IRC Sec. 2036 to transferred FLP or FLLC interests if a non-tax reason, preferably an

investment non-tax reason, exists for the creation of the FLP or FLLC.94

Second, the enactment of IRC Sec. 2036(c) and its subsequent repeal demonstrate that

going forward Congress intended to address the preferred/common structure solely by means of

the gift tax rules of Chapter 14 (IRC Sec. 2701) and not by including the transferred common

interest in the transferor’s gross estate under IRC Sec. 2036. The legislative history of the repeal

93 Rev. Rul. 83-120, 1983-2 C.B. 170.

94

Estate of Kimbell v. United States, 371 F.3d 257 (5th

Cir. 2004); Church v. United States, 85 A.F.T.R. 2d

(RIA) 804 (W.D. Tex. 2000), aff’d without published opinion, 268 F.3d 1063 (5th

Cir. 2001) (per curiam),

unpublished opinion available at 88 A.F.T.R. 2d 2001-5352 (5th

Cir. 2001); Estate of Bongard v. Comm’r, 124 T.C.

95 (2005); Estate of Stone v. Comm’r, 86 T.C.M. (CCH) 551 (2003); Estate of Schutt v. Comm’r, T.C. Memo

2005-126 (May 26, 2005); Estate of Mirowski v. Comm’r, T.C. Memo 2008-74; Estate of Miller v. Comm’r, T.C.

Memo 2009-119; Rayford L. Keller, et al. v. United States of America, Civil Action No. V-02-62 (S.D. Tex. August

20, 2009); Estate of Murphy v. United States, No. 07-CV-1013, 2009 WL 3366099 (W.D. Ark. Oct. 2, 2009); and

Estate of Samuel P. Black, Jr., v. Comm’r, 133 T.C. No. 15 (December 14, 2009); and Shurtz v. Comm’r, T.C. Memo

2010-21.

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of IRC Sec. 2036(c) unmistakably manifests this Congressional intent. Thus, even if the transfer

of the growth interests occurs at the taxpayer’s death, because of that strong legislative intent, IRC

Sec. 2036 should not apply.

In 1987, the Tax Court in the Boykin95case ruled that because of state property law,96 the

receipt of income from retained preferred stock is only a retention of income from the preferred

stock, not from the assets of the entire enterprise and accordingly should be included in a

decedent’s estate under IRC Sec. 2033, and not under IRC Sec. 2036. The court concluded that

Mr. Boykin did not have a legal retained property right to the income of the assets of the

corporation, he only retained a legal right to the income of the retained preferred stock.

In 1987 Congress passed legislation to overturn the result of Boykin, IRC Sec. 2036(c).

For a very brief period, 1987 to 1990, IRC Sec. 2036(a), when it applied, did operate to include the

partnership assets of a partnership in which a preferred partnership interest was created to the

exclusion of IRC Sec. 2033. (While IRC Sec. 2033 also could have applied in 1987 to include the

same partnership interests, Congress was very careful to reverse the traditional priority of IRC

Sec. 2033 inclusion over IRC Sec. 2036 inclusion with the passage of IRC Sec. 2036(c)(5)). In

1987, Congress explored whether or not to do away with minority and marketability discounts

with respect to family partnership and family corporations and whether to attack so-called estate

freezes. At that time, Congress decided not to attack FLP discounts or discounts associated with

family corporations. However, Congress decided to attack so-called estate freezes by making

estate freezes that met six defined tests (described in IRC Sec. 2036(c)) subject to the IRC Sec.

2036(a) inclusion. Please also see the discussion in Section VIII C 1 of this paper.

3. Considerations of the Technique.

a. Despite State Property Law, the IRS May Take the Position That

the Gift of the Preferred Interest of an FLLC Should Be Considered

a Non-deductible Partial Gift of the Underlying Assets of the

FLLC.

IRC Sec. 170(f)(3) denies an income tax charitable deduction, and IRC Sec. 2522(a)(2)

denies a gift tax charitable deduction, for a contribution of an interest in property that consists of

95 See Estate of Boykin v. Commissioner, T.C. Memo 1987-134, 53 T.C.M. (CCH) 345.

96 Under certain Supreme Court holdings, in determining the value for gift and estate tax purposes of any

asset is transferred, the legal rights and interests inherent in that transferred property must first be determined under

state law. See United States v. Bess, 357 U.S. 51 (1958); Morgan v. Commissioner, 309 U.S. 78 (1940); see also H.

REP. NO. 2543, 83rd Cong. 2nd Sess., 58-67 (1954); H.R. REP. NO. 1274, 80th Cong. 2nd Sess., 4 (1948-1 C.B. 241,

243); S. REP. NO. 1013, 80th Cong., 2nd Sess., 5 (1948-1 C.B. 285, 288) where the Committee Reports on the 1948

changes in the estate taxation of community property states: “Generally, this restores the rule by which estate and gift

tax liabilities are dependent upon the ownership of property under state law.” See also the reports of the Revenue Act

of 1932 that define “property” to include “every species of right or interest protected by law and having an

exchangeable value.” H.R. REP. NO. 708, 72nd Cong., 1st Sess., 27-28 (1932); S. REP. NO. 665, 72nd Cong., 1st

Sess., 39 (1932).

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less than the taxpayer’s entire interest in such property. A gift of the entirety of an asset or an

undivided portion of the taxpayer’s entire interest in property to a charity does qualify for the

income tax and gift tax charitable deduction. The undivided portion of the taxpayer’s entire

interest in property must consist of a fraction or percentage of each and every substantial interest

or right the decedent owned in the property. IRC Sec. 170(f)(3)(B)(ii) and Treas. Reg.

§1.170A-7(b) provide that a deduction is allowed for a contribution, that is not in trust, of a partial

interest that is less than the donor’s entire interest in property if the partial interest is an undivided

portion of the donor’s entire interest. An undivided portion of a donor’s entire interest in property

must, however, consist of a fraction or percentage of each and every substantial interest or right

owned by the donor in such property. See Rev. Rul. 88-37, 1988-1 C.B. 97 (1988).

The Tax Court in the Estate of John Boykin97 held that an ownership of a preferred equity

interest does not entitle the owner to any rights to the assets of the entity – it only entitles the

owner to rights in the preferred interest. Any gift of the preferred interest should be analyzed as a

gift of the preferred interest not a gift of certain rights over the entity’s assets. Consistent with the

Boykin case cited above, the preferred interest should be considered to be a separate interest both

from the FLLC’s assets and from George’s other interests in the FLLC. The separate preferred

interest is transferred in its entirety. In this example, all of George’s preferred interest passes to

charity – he does not retain any interest in the preferred interest or make a gift of part of the

preferred interest, so the transfer is not “a contribution (not made by a transfer in trust) of an

interest in property which consists of less than the taxpayer's entire interest in such property.” IRC

Sec. 170(f)(3).

On the gift tax side (see IRC Sec. 2522(c)(2)) there are two Supreme Court cases stating

that the gift tax consequences should be applied in a manner that follows a state property law

analysis.98

97 Estate of Boykin v. Commissioner, T.C. Memo. 1987-134, 53 T.C.M. 345. See also Hutchens Non-

Marital Trust v. Comm’r, 66 T.C.M. (CCH) 1599 (1993) ( The Tax Court held that the interest that the decedent held

in his family-owned corporation prior to recapitalization was not includible in his gross estate under IRC Sec. 2036

because the decedent received adequate consideration for the pre-recapitalization stock, the decedent retained no

interest in stock surrendered in the recapitalization, and the decedent’s post-recapitalization control and dividend rights

came from new and different forms of preferred stock that he received in the recapitalization. See also Todd

Angkatavanich, Jonathan G. Blattmachr and James R. Brockway, “Coming Ashore – Planning for Year 2017 Offshore

Deferred Compensation Arrangements: Using CLAT’s, PPLI and Preferred Partnerships and Consideration of the

charitable Partial Interest Rules,” 39 ACTEC Law Journal 103, 130-145, 152-153. The authors discuss McCord v.

Comm’r, 120 T.C. 358(2003), rev’d and remanded, 461 F.3d 614 (5th

Cir. 2006), Church v. United States, 85 AFTR

2d 2000-804 (W.D. Texas 2000), aff’d 268 F.3d 1063 (5th

Cir. 2201), and Estate of Strangi v. Comm’r, 115 T.C. 478

(2000), aff’d in part and remanded in part, 293 F.3d 279 (5th

Cir. 2002), on remand 85 T.C.M. (CCH) 1331 (2003),

aff’d 417 F.3d 468 (5th

Cir. 2005) and conclude that a gift of a preferred interest to a charity should not be considered

a gift of a partial interest because the courts follow the entity rule in determining the property rights associated with a

partnership interest. The authors also conclude the argument is strengthened if the gift of a preferred interest is made

to a qualifying trust (e.g., a charitable lead trust) and/or the donor only owns the donated preferred interest and does

not own any other interest in the partnership. (See the discussion in Section VII C of this paper.)

98 See United States v. Bess, 357 U.S. 51 (1958) and Morgan v. Commissioner, 309 U.S. (1940).

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State law does not treat a partnership interest as a partial interest in the underlying assets of

the partnership. A partner is not a co-owner of partnership property and has no interest in

partnership property that can be transferred, either voluntarily or involuntarily. Revised Uniform

Partnership Act, §501. The only transferable interest of a partner in the partnership is the

partner’s share of the profits and losses of the partnership and the partner’s right to receive

distributions. Ownership of a partnership interest does not entitle the owner to any rights over

property owned by the partnership. Revised Uniform Partnership Act, §502; Michtom v. United

States, 573 F.2d 58, 63 (Ct. Cl. 1978); PLR 9825001. Partnerships are distinct entities. Revised

Uniform Partnership Act, §201.

Despite state property law, there is a possibility that the IRS could attempt to deny a

charitable deduction for a contribution of preferred units. Treas. Reg. §1.170A-6(2) allows a

deduction for a contribution of a partial interest in property only “if such interest is the taxpayer’s

entire interest in the property, such as an income interest or a remainder interest.” “If, however,

the property in which such partial interest exists was divided in order to create such interest and

thus avoid IRC Sec. 170(f)(2), the deduction will not be allowed.” Id. The IRS may take the

position that Section 170(f)(3) can apply despite the fact that a contributed interest becomes a

separate property interest for federal tax purposes as a result of the transfer. For instance, the IRS

has denied charitable deductions in situations where the donor had donated common stock but

retained the right to vote that stock (see Rev. Rul. 81-281, 1981-2 C.B. 78; PLR 8136025) because

the right constitutes a substantial interest. Carving the right to vote away from the economic

interest in the common stock created a non-deductible partial interest.

Similarly, in Rev. Rul. 88-37, the IRS denied a deduction because the donor did not

contribute the donor’s entire interest in his property but carved out and contributed only a portion

of that interest. Further, the portion contributed was not an undivided portion of the donor’s entire

interest—it did not convey a fraction of each and every substantial right owned by the donor in the

property. By transferring an overriding royalty interest or a net profits interest, the donor retained

the right inherent in the “working interest” (the ownership of an operating interest under an oil and

gas lease) to participate in the control of, the development and operation of the lease. This right to

control or to participate in the control, similar to the retained voting rights in Rev. Rul. 81-282, is

a substantial right, the retention of which prevented the donated interest from being considered an

undivided portion.

There are numerous business and financial reasons to form a partnership or FLLC as an

advantageous vehicle for, and being in the best interests of, the members of a family, including

consolidation of the management and control of family assets within a partnership owned by the

eventual owners of all of the assets; avoidance of fractional asset ownership over time; greater

creditor protection; greater ability to keep assets in the family, etc. The more of these factors that

are applicable to any proposed FLLC the less likely the contribution of preferred units will be

attacked as a prohibited gift of partial interests.

The proposed FLLC should be created for reasons independent of obtaining a charitable

deduction and independent of avoiding section 170(f)(3). The fact that the charitable deduction is

likely to be only 30% of the value of the preferred units given away may demonstrate that other

reasons are more important than the charitable deduction. The more participants in the FLLC the

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more likely it was created for purposes independent of obtaining a charitable deduction and the

less likely the IRS will deny the charitable contribution as a gift of a partial interest.

Consequently, it is important to establish that the purpose of the FLLC is not to slice the

voting rights from the FLLC’s underlying securities by retaining the managing units (which

control the FLLC and thereby control the vote of the underlying securities) and donating only the

preferred units (which carry no control over the FLLC). Having an independent entity from the

donor as a manager will strengthen the donor’s position.

Another factor that could bolster the argument that the FLLC was not created for purposes

only related to dividing the economic interests of the contributed property to the FLLC in order to

circumvent the partial interest rule is the longevity of the FLLC before gifts are made to charity.

The longer the FLLC exists prior to the contribution, the more a separate purpose would be

indicated. Please see Rev. Rul. 86-60, 1986-1 C.B. 302 (four-year delay between creation of

partial interest and proposed contribution); Rev. Rul. 76-523, 1976-2 C.B. 54 (1976) (split of

interests in stock was for business purpose and done years before the transfer to charity); PLR

20010812 (eight-year delay between the donor’s transfer of voting rights in common stock to a

voting trust and her charitable donation of that stock); PLR 9721014 (ten-year delay between

creation of partial interest and the proposed contribution).

b. If the Gift of the Preferred Interest is to a Donor Advised Fund

(Instead of Some Other Public Charity) Care Should Be Taken to

Make Sure There is Not a Tax on Excess Business Holdings Under

IRC Sec. 4943.

This example assumes the FLLC owns only financial assets. If the FLLC owns trade or

business assets and if the preferred is given to a donor advised fund (instead of some other public

charity) the excess business holding rules need to be considered. See IRC Sec. 4943(b).

c. The Taxpayer Must Comply With Certain Reporting Requirements

in Order to Receive a Deduction For the Fair Market Value of the

Donated Preferred Interest.

Among the reporting requirements are:

1. The taxpayer must get and keep a contemporaneous written acknowledgment

of the contribution from the charity. See IRC Sec. 170(f)(8)(A).

2. The taxpayer must also keep records that include how the taxpayer acquired

the property and the basis information for the donated preferred interest. See

Treas. Reg. §§1.170A-13(b)(3)(i)(A), (B).

3. The taxpayer must also obtain a qualified written appraisal of the donated

property from a qualified appraiser, if the preferred interest is worth more than

$500,000 attach the qualified appraisal to the taxpayer’s return. See IRC Sec.

170(f)(11)(D).

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d. If There is Unrelated Business Taxable Income Associated With

Assets Owned By the FLLC, Some Public Charities Will Not

Accept the Gift of the Preferred Interest in the FLLC.

All items of income of the FLLC will be proportionately allocated to the owner of the

preferred interest, including items of income that are considered unrelated business income,

which will be subject to the unrelated business income tax under IRC Sec. 511. The unrelated

business income tax is imposed on the unrelated business taxable income of most exempt

organizations. Gross income subject to the tax consists of income from a trade or business

activity, if the business activity is not substantially related to the charity’s exempt purposes and is

regularly carried on by the organization. Even passive income, such as dividends and interest,

will be subject to the tax, if the income is derived from debt-financed property.

C. The Use of a High-Yield Preferred Partnership or Membership Interest With a

Charitable Lead Annuity Trust (“CLAT”).

What is a CLAT?

(i) A CLAT is a trust in which the lead interest is payable to a charity and is in

the form of an annuity amount for the term of the lead interest.

(ii) In the CLAT, the annual payment is not based on the income of the trust.

Since the annuity amount is not based on the income of the trust, that amount

must be paid to the charity even if the trust has no income. If the trust’s

current income is insufficient to make the required annual payment, the short

fall must be made up out of the invasion of the trust principal. If the current

income exceeds the required annual payment, it does not have to be paid over

to the charity; however, the excess income would then be accumulated and

added to the trust corpus.

(iii) The lead interest in a CLAT can be for a fixed term of years. Unlike a

charitable remainder trust, the fixed term can be indefinite. 99 The lead

interest can also be measured by the life of an existing individual or the joint

lives of existing individuals.

(iv) CLATs are not subject to the minimum payout requirements associated with

charitable remainder trusts. Thus, there is no 5% minimum pay out for

CLATs.

99 IRC Sec. 170(f)(2)(B).

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(v) The CLAT is not a tax-exempt entity, unless the CLAT is a grantor trust. If

the CLAT is a non-grantor trust and if taxable income is accumulated in the

trust it will be subject to income taxes. The CLAT will receive a charitable

income tax deduction when it makes the distribution to the charity. If the

CLAT is a grantor trust, the grantor will receive an income tax deduction for

the actuarial value of the charitable gift of the annuity amounts upon creation

of the CLAT. If the CLAT is a grantor trust, there will not be any future

income tax deductions for distributions to charities.

(vi) CLATs are characterized as private foundations for purposes of certain

restrictions placed on such organizations. Accordingly, CLATs are subject

to private foundation excise tax provisions. 100 The governing trust

instrument must contain specific prohibitions against (i) self-dealing;

(ii) excess business holdings; (iii) jeopardy investments; and (iv) taxable

expenditures. 101 If the specified prohibited transactions occur onerous

significant excess taxes could accrue.

1. The Technique.

What if a financial engineering technique existed that would generally ensure the financial

success (from the remainderman’s perspective) of a CLAT and would create additional discounts

for any future non-charitable gifts to family members? Consider the following example:

If a taxpayer creates a preferred interest in a FLP or a FLLC and contributes that preferred

interest to a CLAT, the success of the CLAT is virtually assured. This is because all of the assets

and the income of all of the assets of the FLP or FLLC are available to ensure the success of the

coupon payments that are made on the preferred interest that is contributed to the CLAT.

Assuming the preferred coupon rate is substantially in excess of the IRC Sec. 7520 rate,

substantial assets will be available to the remainder beneficiaries of the CLAT on its termination.

Consider the following Example 10, which has the same facts as Example 9, except the

gift of the preferred interest is a 17.5-year CLAT that is treated as a grantor trust:

100 IRC Sec. 4947(a)(2).

101 See IRC Secs. 4941(a), (b), 4943(a), (b).

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2. Advantages of the Technique.

a. Because of the Difference in the Yield of a Preferred Coupon of a

Preferred Interest in a FLLC That is Compliant With Revenue

Ruling 83-120 and the IRC Sec. 7520 Rate, the Transfer Tax

Success of a CLAT is Virtually Assured.

Under the assumed facts of the above illustration, George will successfully transfer his

preferred interest in 17.5 years to a trust for his children without using any gift tax exemption and

George will not be taxed on the income allocated to the charity. The Donor FLLC needs only to

earn 1.17% annual return to have enough earnings to satisfy the $70,000 annual preferred coupon.

The preferred partnership interest or limited liability interest appears to work very well

from a transfer tax perspective with all varieties of CLATs, including level payment CLATs,

back-loaded payment CLATs, grantor CLATs and non-grantor CLATs.102

102

See Paul S. Lee, Turner P. Berry & Martin Hall, “Innovative CLAT Structures: Providing Economic

Efficiencies to a Wealth Transfer Workhorse,” 37 ACTEC Law Journal 93, 151-53 (Summer 2011).

SSE01WM -93-

b. IRC Sec. 2701 Valuation Rules Will Not Apply to a Gift of the

“Growth” Interests in a FLLC if the Preferred Interests Are Owned

By a CLAT.

In addition to the inherent benefits of a high yielding financial instrument being utilized

when the IRC Sec. 7520 rate is low, there are additional estate planning benefits to the structure.

As noted above the valuation rules of IRC Sec. 2701 do not apply to gift of the growth member

interests if the donor does not retain the preferred partnership interests.103 If the growth interest in

the FLP or FLLC could be given or sold, additional estate planning benefits could accrue.

Substantial valuation discounts may exist with respect to any growth interests that are donated or

sold, because of the presence of the preferred interest. Consider the following table (also see

Schedule 7 attached to this paper):

Table 10

c. The Donor Will Not Pay Income Taxes or Healthcare Taxes on

Income That is Allocated to the CLAT, if the CLAT is a

Conventional CLAT and is Not a Grantor Trust.

See the discussion in Section VII B 2 of this paper.

3. Considerations of the Technique.

a. The Partial Interest Rule Should Not Apply For Gift Tax Purposes

or Income Tax Purposes (if a Grantor CLAT is Used), But the IRS

May Make the Argument.

The income tax deduction is obviously unimportant if a non-grantor CLAT is used,

because the gift on the annuity in a non-grantor CLAT is not eligible for an income tax deduction.

103 See the discussion in Section VII B 2 f of this paper.

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What if the CLAT is a grantor trust? It is then important to receive an upfront income tax

deduction. The question then becomes whether section 170(f)(3), which denies a charitable

deduction for a contribution to charity (not made by a transfer in trust) of certain partial interests

in properly, trumps the deduction allowed under 170(f)(2) for gifts to grantor CLATs. The answer

should be no.

In addition to the arguments and analysis in Section VII B 3 of this paper, there is the

additional benefit of having the gift structured as a gift of an annuity interest in a charitable lead

annuity trust. The sought-after deduction is not for the contribution of the partial interest to the

trust, but rather for the contribution of the term interest in the trust to charity. The deduction must

be allowable “with respect to the trust,” not with respect to the assets contributed to the trust. The

charitable deduction is specifically allowed by section 170(f)(2) for the contribution of the term

interest in the grantor lead trust. Here, the deduction is allowable with respect to the grantor lead

trust as long as the grantor lead trust otherwise meets the description of section 664. Second,

section 170 (f)(3) specifically refers to contributions “not made by a transfer in trust”, whereas

170(f)(2) refers to contributions “in trust.” Subsections 170(f)(2) and 170(f)(3) are mutually

exclusive: the first applies to contributions in trust and the second applies to contributions outside

of trust.

Concerns about the partial interest issue arise from Private Letter Ruling 9501004. This

ruling involved a charitable trust funded with an option to purchase real estate. The donor

contributed an option to purchase real estate instead of contributing real estate itself because the

real estate was encumbered by debt. According to the ruling, an option does not, before exercise,

vest in the optionee any interest, estate or title in the land. Accordingly, the taxpayer would not be

allowed a charitable deduction in the year in which the option was granted but would be allowed a

deduction in the year in charitable organization exercised the option. See Rev. Rul. 82-197,

1982-2 CB 1982).

In that ruling, the IRS disregarded the specific language of Treas. Reg. §1.664-l(a)(l)(iii).

That section defines qualified charitable remainder trusts as trusts for which an income or transfer

tax deduction is allowable. It does not require that each contribution to a trust must be

independently deductible in order for the trust to qualify. As justification for ignoring this

distinction, the IRS relies upon its “function exclusively” weapon of Treas. Reg. §1.664-l(a)(4),

which requires that the charitable remainder trust at all times throughout its existence must “meet

the definition of and function exclusively as a charitable remainder trust.” Using this weapon, the

IRS read into section 1.664-l(a)(l)(iii) a requirement that each asset contributed to the trust must

independently qualify for a charitable deduction under section 170, 2055, 2106 or 2522 in order

for the trust to be, and to function exclusively as, a charitable remainder trust “in every respect.”

There is no direct authority to support this argument as there is no direct authority regarding what

constitutes meeting the definition of and functioning exclusively as a charitable remainder trust.

Based on this questionable interpretation of the statute and the regulation’s language, the

IRS proceeded to discuss the denial of the income tax deduction based on the partial interest rule

of section 170(f)(3). The IRS posited an example where the property contributed to the trust

ultimately passed outside the trust: the facts in the ruling indicated that the option would never be

exercised by a charitable organization or trust, but rather would be assigned to a third party. Then,

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relying on the partial interest rule of section 170(f)(3) (not 170(f)(2)), the IRS denied the income

tax deduction because the contribution was of a partial interest which passed outside of the trust.

The ruling goes out of its way to say: “However, no deduction would be allowable under [the

partial interest rule] for any payment made to such a third party purchaser that purchases and

exercises the purported option. In such a situation, the payment by Taxpayer would be made to

the third party charitable organization outside the trust [emphasis added].” That statement would

not be necessary if the option itself, as a partial interest, disqualified the trust.

It is also important for purposes of the gift tax charitable deduction whether the partial

interest rule applies. As discussed below, the partial interest rule should also not apply for gift tax

purposes. Even if the income tax deduction is denied under section 170, the CLAT still qualifies

for a gift tax deduction because a gift tax deduction remains allowable under section 2522.

Section 2522 does not appear to incorporate a 170(f)(3)-type partial interest rule. PLR 9501004

did not address whether section 2522 indirectly incorporates a partial interest rule because the gift

was found to be incomplete. “Such [an incomplete] transfer would not constitute a transfer to the

Trust for which a gift tax charitable deduction is allowable with respect to the Trust.” The

converse is implied to be true - if the payment by Taxpayer would be made to a charitable

organization inside a trust, such a transfer would constitute a transfer for which a gift tax

charitable deduction is allowable with respect to the trust.

The IRS did not import a 170(f)(3)-type partial interest rule into section 2055 in its private

letter ruling 200202032. In that ruling, the taxpayer had previously contributed to the museum all

of his right, title and interest in and to a 50% undivided interest in 32 paintings. At his death, the

taxpayer bequeathed his remaining 50% undivided interest in the 32 paintings to the museum. The

ruling held that the taxpayer's 50% undivided interest qualified for the estate tax charitable

deduction under section 2055, despite being partial interests.

Sections 170(f)(2), 170(f)(3), 2055(e)(2) and 2522(c)(2) were enacted as part of a

comprehensive revision of the tax treatment of charitable contributions in the Tax Reform Act of

1969, Pub. L. No. 91-172, 83 Stat. 487. In that legislation, Congress provided rules governing

charitable gifts of partial interests outside of trust, see IRC 170(f)(3); income tax deductions for

gifts in trust, see IRC §170(f)(2); estate tax deductions, see IRC §2055(e)(2), and gift tax

deductions, see IRC §2522(c)(2). Notably, Congress did not include a corresponding l70(f)(3)-

like provision in 2055 or 2522.

The legislative history concerning income tax deductions for gifts of partial interests not in

trust weighs against importing the same restrictions into 2055 and 2522. The history focused on

the practice of taking a deduction for the donation of the rent-free use of property for a specified

time. Congress agreed with the IRS's position that in such a situation a taxpayer obtains a double

benefit by being able to claim a deduction for the fair rental value of property and also exclude

from income the receipts from the donated interest during the period of the donation. The

legislative solution was to permit the exclusion but deny an income tax deduction. See H.R. Rep.

No. 413, 91st

Cong., 1st

Sess. 57-58 (1969), 1969-3 C.B. at 239. This solution is not relevant in

the transfer tax context.

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b. Care Should Be Taken to Make Sure That There is Not a Tax on

Excess Business Holdings Under IRC Sec. 4943.

This example assumes the FLLC owns only financial assets. If the FLLC owns a trust or

business, since the CLAT will be considered a private foundation, the excess business holding

rules and IRC Sec. 4943 need to be considered.

c. If the CLAT is a Grantor Trust the Grantor Will Pay the Income

Taxes on the Earnings of the CLAT.

However, from a transfer tax planning point of view, that is generally advantageous.

VIII. HOW THE LEVERAGED FLLC ASSET GRAT COULD FACILITATE FUTURE

TRANSFER TAX PLANNING, IF THE IRS ISSUES REGULATIONS UNDER IRC

SEC. 2704(b)(4) THAT ARE CONSISTENT WITH THE FEBRUARY 13, 2012

GREENBOOK PROPOSAL.

When Congress added Chapter 14 of the Internal Revenue Code it gave the IRS in IRC

Sec. 2704(b)(4) the power to disregard restrictions other than the liquidation restrictions

otherwise described in Chapter 14, if those restrictions would have the effect of reducing the value

of a transferred interest below what the value would be absent the restriction. However, Congress

did not give the IRS the power to substitute new provisions for the disregarded provisions or to

rewrite the state statutory law or common law that would apply if a provision of the organizational

documents of an entity were disregarded.

A. The Possible Form of the IRS Regulations That May Be Issued Under IRC Sec.

2704(b)(4).

An item promising additional guidance regarding restrictions on liquidation first appeared

in the IRS “Priority Guidance Plan” for 2003-2004. The promise of “Guidance” was changed to a

promise of “Regulations” in the 2010-2011 plan. Meanwhile, in May, 2009, the Obama

Administration proposed statutory changes to IRC Sec. 2704(b) in the “General Explanations of

the Administration’s Fiscal Year 2010 Revenue Proposals” (the “Greenbook”). The proposal was

repeated without substantive change in the Greenbooks for Fiscal 2011, 2012, and 2013. It did

not appear in the Greenbooks for Fiscal 2014, 2015, or 2016. The last version of the

Administration proposal appeared in the Greenbook for fiscal 2013, released on February 13,

2012 (the “Greenbook Proposal”).

Congress has not adopted the expansion of IRC Sec. 2704(b) proposed by President

Obama. In fact, a bill to that effect has not even been introduced in Congress. Nevertheless, on

May 5, 2015, BNA reported that in an ABA Tax Section meeting a representative for the IRS

Office of Tax Policy, stated that regulations will be issued in the near future under IRC Sec.

2704(b)(4). It was reported that she said the form of the regulations will be similar to the

Greenbook Proposal, even though that enabling legislation has not been passed by Congress and it

is unlikely it will ever be passed by Congress.

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The Greenbook Proposal would have expanded the scope of IRC Sec. 2704(b) as follows:

This proposal would create an additional category of restrictions (“disregarded

restrictions”) that would be ignored in valuing an interest in a family-controlled

entity transferred to a member of the family if, after the transfer, the restriction will

lapse or may be removed by the transferor and/or the transfer’s family.

Specifically, the transferred interest would be valued by substituting for the

disregarded restrictions certain assumptions to be specified in regulations.

Disregarded restrictions would include limitations on a holder’s right to liquidate

that holder’s interest that are more restrictive than a standard to be identified in

regulations. A disregarded restriction also would include any limitation on a

transferee’s ability to be admitted as a full partner or to hold an equity interest in

the entity. For purposes of determining whether a restriction may be removed by

member(s) of the family after the transfer, certain interests (to be identified in

regulations) held by charities or others who are not family members of the

transferor would be deemed to be held by the family. Regulatory authority would

be granted, including the ability to create safe harbors to permit taxpayers to draft

the governing documents of a family-controlled entity so as to avoid the application

of section 2704 if certain standards are met. This proposal would make conforming

clarifications with regard to the interaction of this proposal with the transfer tax

marital and charitable deductions. (Emphasis added.)

I am not aware of any published explanation for the Administration’s withdrawal of the

Greenbook Proposal. It is clear, however, that the proposed legislation would have conferred

authority that is not contained in the existing regulatory authority under IRC Sec. 2704(b)(4),

which provides:

(4) OTHER RESTRICTIONS – The Secretary may by regulations provide that

other restrictions shall be disregarded in determining the value of the transfer of

any interest in a corporation or partnership to a member of the transferor’s family, if

such restriction has the effect of reducing the value of the transferred interest for

purposes of this subtitle but does not ultimately reduce the value of such interest to

the transferee. (Emphasis added.)

This provision authorizes the IRS by regulation to expand the list of restrictions that are

disregarded, but only in the case of restrictions that reduce an interest’s value for gift or estate tax

purposes, but do not “ultimately” reduce its value to the transferee. The sole authority conferred

on the IRS is to place a restriction meeting the statutory criteria on the “disregarded” list. The IRS

is not authorized (i) to create a new category of “disregarded restrictions” based on assumptions

and criteria that are not contained in the statute, which could apply to restrictions already covered

by the statute, and/or to restrictions that do not reduce the value of a transferred interest below

what the value would be under state law absent the restriction; (ii) to prescribe that an interest

subject to a disregarded restriction shall be valued in a manner determined in the regulations,

rather than in the manner already prescribed under IRC Sec. 2704(b), i.e., by treating the

restriction as if it did not exist and otherwise applying the organizational documents and

applicable state law; or (iii) to disregard a restriction imposed by applicable state law. The

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Greenbook Proposal would have enacted directly, and/or have conferred authority on the IRS to

enact by regulation, both (i) and (ii), and possibly (iii). At no point did the Greenbook Proposal

suggest that these goals could be accomplished by regulations under existing IRC Sec.

2704(b)(4). The whole point of the Greenbook Proposal was to confer the additional statutory

authority necessary to enact these goals directly, or by regulations.

Some have speculated that the new regulations would be directed only at FLPs holding

investment assets. 104 However, neither IRC Sec. 2704(b) nor any other part of Chapter 14

104 “Navigating Tougher I.R.S. Rules for Family Partnerships,” NEW YORK TIMES (August 7, 2015);

Moyer, “IRS Takes Aim at an Estate-Planning Strategy THE WALL STREET JOURNAL (June 26, 2015). However,

that distinction does not appear in the legislative history or in the statute. It is common for both non-family and family

partnerships to own passive securities. Furthermore, Congress and the Treasury have long recognized that it is

common and proper for groups (including families) to use partnerships to hold only passive securities and that form of

organization should be recognized for all tax purposes:

(i) The IRS, because of IRC Sec. 7701(a)(2), has always recognized that “passive investment clubs,”

through which investors engage in passive investment activities, may be conducted in the partnership form of

ownership for all federal tax purposes (including transfer tax purposes). (See Rev. Rul. 75-523, 1975-1 C.B.

257 (because of IRC Sec. 7701(a)(2), a partnership was recognized for tax purposes even though the only

purpose of the partnership was to invest in certificates of deposit) and Rev. Rul. 75-525, 1975-1 C.B. 350

(because of IRC Sec. 7701(a)(2), a partnership form of ownership was recognized for tax purposes even

though the only purpose of the partnership was to invest in marketable stocks and bonds)).

(ii) The Internal Revenue Code liberally defines the term “partnership” in IRC Secs. 761(a), 6231(a),

and 7701(a). Under the Internal Revenue Code, Congress clearly provides that for income, gift, estate, and

generation-skipping tax purposes unless it is “manifestly incompatible” with Congress’ intent, a group or

syndicate that carries on business or financial operations and is neither a corporation, nor a trust, nor an

estate is a partnership for purposes of Chapters 1, 11, 12, 13, and 14. Congress clearly intended that an

individual would always be treated as a partner of a partnership for purposes of Chapters 1, 11, 12, 13, and 14

of the Code if that individual is a member of a group that conducts any financial operation, including

investing in stocks and bonds, unless that group is a trust, an estate, or a corporation.

(iii) Specific rules that apply only to partnerships holding passive investment assets appear in the

Internal Revenue Code and the Treasury Regulations:

(1) Under IRC Sec. 721, taxpayers contributing assets to a partnership that is deemed an

“investment company” (generally, one made up of over 80% marketable stocks or securities, or

interests in regulated investment companies or real estate investment trusts) will recognize gain or

loss on contribution unless each partner’s contributed stock portfolio is substantially diversified.

(2) IRC Sec. 731(c)(3)A(iii) addresses the favorable tax treatment of distributions of

marketable securities made to partners of “investment” partnerships (which is defined under IRC

Sec. 731(c)(3)(C)(i) as a partnership which has never engaged in a trade or business and substantially

all of its assets are passive securities).

(3) Treas. Reg. §1.704-3(e)(3) contains a special aggregation rule for “securities” partnerships

(at least 90% of the partnership’s non-cash assets consist of stocks, securities and similar instruments

tradable on an established securities market).

(4) Treas. Reg. §1.761-2(a) expressly confirms that investment partnerships are to be treated as

partnerships under subchapter K (unless a contrary election is made).

(5) The final anti-abuse regulation acknowledges that the “business” activity of a partnership

may be investing assets: “Subchapter K is intended to permit taxpayers to conduct joint business

SSE01WM -99-

distinguishes between passive investment companies and active businesses, because of the many

unanswerable questions it prompts. Is a holding company active or passive if it owns active

businesses through subsidiaries? Is the parent who crop shares the farm with her farming children

active or passive? When does rental real estate become active or passive? What if the real estate

is passively rented to the taxpayer’s active business? What about working capital? Congress

understood when it enacted Chapter 14 that drawing those distinctions is impossible; the

administration is not authorized to create such distinctions now. From the Greenbook Proposal, it

appears that the regulations might target limited partnerships, but such regulations would

necessarily include limited liability companies,105 which may be the entity type most often used

for active businesses today.106 It may be an exaggeration to say that the proposed regulations

would not impact family businesses.

B. The Taxpayer Must Demonstrate That a Regulation Under IRC Sec. 2704(b)(4) is

an Unreasonable and an Invalid Extension of IRC Sec. 2704(b)(4), Because it is

Manifestly Contrary to That Statute, in Order to Have That Regulation Ignored in

Transferring an Interest in a Closely Held Family Enterprise.

The seminal case under Chapter 14 finding a Treasury Regulation was an unreasonable

and invalid extension of the relevant Internal Revenue Code section is Audrey Walton v.

Commissioner, 115 T.C. 589 (2000). In Walton, the full Tax Court found Treas. Reg.

§25.2702-3(e), Example 5 was an invalid interpretation of IRC Sec. 2702 because the regulation

did not follow the origin and purpose of the statute.

The Court found that the taxpayer had met its burden to overturn that regulation example,

whether the taxpayer burden of overturning an “interpretive” regulation is used, or the taxpayer

burden of overturning a “legislative” regulation is used:

The regulations at issue here are interpretative regulations promulgated under the

general authority vested in the Secretary by section 7805(a). Hence, while entitled

to considerable weight, they are accorded less deference than would be legislative

regulations issued under a specific grant of authority to address a matter raised by

the pertinent statute. See Chevron U.S.A., Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837, 843-844 (1984) (Chevron). United States v. Vogel

(including investment) activities through a flexible economic arrangement without incurring an

entity-level tax.” (See, Treas. Reg. §1.701-2(a) (emphasis added). The parenthetical language

referring to investment as a business activity was added after the release of the proposed regulation.

Compare Prop. Reg. § 1.701-2(a).

105 IRC Sec. 7701 has generally treated a family limited liability company (“FLLC”) as a partnership for

federal income tax purposes, including for purposes of Chapter 14. However, under the Check the Box regulations in

Treas. Reg. §301.7701-1 et al. most state law entities can elect to be a partnership, an S Corporation (because it is

taxed under subchapter S) or an association taxed as a corporation under Subchapter C.

106 The promulgation of the Check the Box regulations allowed states to revise their laws governing FLLC’s

to remove some of the awkward provisions intended to provide partnership income tax treatment. The FLLC form

provides limited liability for all of its owners with fewer formalities than a corporation requires.

SSE01WM -100-

Fertilizer Co., 455 U.S. 16, 24 (1982). A legislative regulation is to be upheld

unless “arbitrary, capricious, or manifestly contrary to the statute.” Chevron

U.S.A., Inc. v. Natural Resources Defense Council, Inc. supra at 843-844.

With respect to interpretative regulations, the appropriate standard is whether the

provision “’implement[s] the congressional mandate in some reasonable manner.’”

United States v. Vogel Fertilizer Co., supra at 24 (quoting United States v. Correll,

389 U.S. 299, 307 (1967)). In applying this test, we look to the following two-part

analysis enunciated by the Supreme Court:

When a court reviews an agency’s construction of the statute which

is administers, it is confronted with two questions. First, always, is

the question whether Congress has directly spoken to the precise

question at issue. If the intent of Congress is clear, that is the end of

the matter; for the court, as well as for the agency, must give effect

to the unambiguously expressed intent of Congress. If, however, the

court determines Congress has not directly addressed the precise

question at issue, the court does not simply impose its own

construction on the statute, as would be necessary in the absence of

administrative interpretation. Rather, if the statute is silent or

ambiguous with respect to the specific issue, the question for the

court is whether the agency’s answer is based on a permissible

construction of the statute. [Chevron U.S.A., Inc. v. Natural

Resources Defense Council, Inc., supra at 842-843; fn. refs.

omitted.]

A challenged regulation is not considered such a permissible construction or

reasonable interpretation unless it harmonizes both with the statutory language and

with the statute’s origin and purpose. See United States v. Vogel Fertilizer Co.,

supra at 25-26; National Muffler Dealers Association v. United States, 440 U.S.

472, 477 (1979) (National Muffler).

We pause to note that before the Chevron standard of review was enunciated by the

Supreme Court, the traditional standard was simply “whether the regulation

harmonizes with the plain language of the statute, its origin, and its purpose”, as

prescribed by the Supreme Court in National Muffler Dealers Association v. United

States, supra at 477. As we have observed in a previous case, the opinion of the

Supreme Court in Chevron failed to cite National Muffler and may have established

a different formulation of the standard of review. See Central Pa. Sav. Association

v. Commissioner, 104 T.C. 384, 390-391 (1995). In the case before us, we

conclude that it is unnecessary to parse the semantics of the two tests to discern any

substantive difference between them, because the result here would be the same

under either.

SSE01WM -101-

Because section 2702 does not speak to the issue of the permissible term for a

qualified annuity, Example 5 does not expressly contradict any statutory language.

Accordingly, we focus on the statute’s origin and purpose for further guidance.

As the Tax Court observed in Walton, uncertainty then existed about whether Chevron

supplanted National Muffler in testing the validity of tax regulations. In 2011 the Supreme Court

resolved this debate and held that the validity of a tax regulation is tested under Chevron. Mayo

Foundation v. United States.107 The Mayo court noted that National Muffler considered a variety

of factors that would not be considered under Chevron, and concluded that the Chevron approach

prevails.

Mayo left open the question whether “legislative” and “interpretive” tax regulations

continue to be subject to different tests in determining their validity under Chevron.108 The

separate tests mentioned by the Tax Court in Walton appear to have support in the Chevron

opinion itself, which states:

If Congress has explicitly left a gap for the agency to fill, there is an express

delegation of authority to the agency to elucidate a specific provision of the statute

by regulation. Such legislative regulations are given controlling weight unless they

are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the

legislative delegation to an agency on a particular question is implicit, rather than

explicit. In such a case, a court may not substitute its own construction of a statutory

provision for a reasonable interpretation made by the administrator of an agency.

467 U.S. at 843-844. However, the Mayo opinion does not clearly acknowledge this distinction or say how it would be

applied to legislative and interpretive tax regulations. Instead the Mayo opinion seems to read

Chevron as applying a uniform test to all regulations, with “not arbitrary, capricious or manifestly

contrary to the statute” and “reasonable interpretation” being different ways of describing the

same test.109

As the Tax Court mentioned in Walton, it was unclear after Chevron whether the former

test for determining if an interpretative regulation is valid still applied. Mayo did not clarify the

issue. The burden inherent in determining if a legislative regulation is valid may now be the

107 107 AFTR2d 2011-341, 131 Sup. Ct. 704 (2011).

108 The terms “legislative” and “interpretive” are used by tax practitioners in a way that differs from standard

terminology under the Administrative Procedure Act. Under the APA, both types of tax regulation would be labeled

“legislative” because both have the force of law.

109 One the one hand, referring to the statutory ambiguity and interpretive regulation at issue in the case, the

Supreme Court said: “In the typical case, such an ambiguity would lead us inexorably to Chevron step two, under

which we may not disturb an agency rule unless it is arbitrary or capricious in substance, or manifestly contrary to the

statute.” (internal quotation marks and citations omitted). 107 AFTR2d p. 2011-345. On the other hand, the Supreme

Court said: “The full-time employee rule easily satisfies the second step of Chevron, which asks whether the

Department's rule is a "reasonable interpretation" of the enacted text.” 107 AFTR2d p. 2011-347.

SSE01WM -102-

standard for both interpretative and legislative regulations. If the burden is the burden for a

legislative regulation, the burden for the taxpayer is for a court to find that the regulation is

“manifestly contrary to the statute.”

The Tax Court in Walton found the regulation example it reviewed did not expressly

contradict any statutory language. However, the court found the regulation it reviewed to be

“manifestly contrary to the statute” by focusing “on the statute’s [IRC Sec. 2702] origin and

purpose.” Chevron and Mayo do not preclude consideration of the statute’s origin and purpose in

determining whether a regulation is contrary to the statute. Furthermore, with respect to a

legislative regulation issued pursuant to a special grant of regulatory power such as that conferred

by IRC Sec. 2704(b)(4), whether a regulation is “contrary to the statute” includes not only whether

it is contrary to the statute it interprets, but also whether it is in compliance with the statutory

provision granting the special power to regulate. As one commentator on Mayo has stated: “A

regulation is valid only to the extent that it accords with the statutory delegation on which it is based.

Thus, assuming that the argument has been properly raised, a court assessing a challenge to a

regulation should identify the precise statutory language of the delegation in question, then determine

whether the regulation is within the scope of that language.”110

C. Arguments That if the Treasury Regulations Under IRC Sec. 2704(b)(4) Take the

Form of the Greenbook Proposal, the Regulations Will Be an Unreasonable and

Invalid Extension of IRC Sec. 2704(b)(4).

What follows in this Section VIII C of the paper are arguments that may compel a taxpayer

who transfers an interest in a closely held family enterprise to take the position that any regulation

that takes the form of the Greenbook Proposal is invalid and should not be applied.

1. If the Taxpayer Demonstrates That a New Regulation is Manifestly

Contrary to the Purpose of IRC Sec. 2704(b), a Court Will Invalidate the

Regulation, Despite Its Not Explicitly Contradicting the Statutory

Language.

Under the Greenbook Proposal, the effect of that substitution may be to value a transfer of

an interest in a family business as if family attribution applied, which is clearly contrary to the

origin and purpose of IRC Sec. 2704(b) and all other provisions of Chapter 14. Stated differently,

IRC Sec. 2704(b)(4) authorizes disregarding a restriction that is not already disregarded under the

statute, but it does not authorize changing the result of disregarding a restriction to something

other than the result prescribed by the statute. There is no language in IRC Sec. 2704(b)(4) that

would permit rewriting IRC Sec. 2704(b) in this way, and to do so would be contrary to the origin

and purpose of IRC Sec. 2704(b).

110 Johnson, Preserving Fairness in Tax Administration in the Mayo Era, 32 Virginia Tax Review (Summer

2012), p. 45.

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a. Prior to the Passage of Chapter 14 in 1990, Case Law For Valuing

Proportionately Held Family Enterprises With One Class of Equity

Provided:

(i) That the Legal Rights and Interests Inherent in That

Property Must First Be Determined Under State Law and

After That Determination is Made Federal Tax Law is

Then Applied to Determine How Such Rights and Interests

Will Be Taxed;

(ii) That Transfers of Non-Controlling Interests in Family

Enterprises Are to Be Valued the Same Way Non-

Controlling Interests in Non-Family Enterprises Are

Valued; and

(iii) There Are No Special Valuation Premiums Because of

Family Attribution For Closely Held Family Enterprises.

(1) Initial IRS Position in 1981 Was That Closely Held Family

Businesses Should Be Valued Differently Than Closely

Held Non-Family Businesses, But That Position Was

Rejected By the Courts Prior to the Passage of Chapter 14.

The courts consistently rejected the IRS position in revoked Rev. Rul. 81-253 that no

minority shareholder discount is allowed with respect to transfers of stock between family

members if, based upon a composite of the family members’ interests at the time of the transfer,

control (either majority voting control or de facto control through family relationships) of the

corporation exists in the family unit. See the IRS position in revoked Rev. Rul. 81-253, 1981-1

C.B. 187. That ruling also states that the IRS would not follow the Bright case discussed below.

In Estate of Bright v. United States, 658 F.2d 999 (5th

Cir. 1981) the decedent’s undivided

community property interest in shares of stock, together with the corresponding undivided

community property interest of the decedent’s surviving spouse, constituted a control block of

55% of the shares of a corporation. The Fifth Circuit held that, because the community-held

shares were subject to a right of partition, the decedent’s own interest was equivalent to 27.5% of

the outstanding shares and, therefore, should be valued as a minority interest, even though the

shares were to be held by the decedent’s surviving spouse as trustee of a testamentary trust.

Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982) accords with the result in Bright.

In addition, Estate of Andrews v. Commissioner, 79 T.C. 938 (1982), and Estate of Lee v.

Commissioner, 69 T.C. 860 (1978), nonacq., 1980-2 C.B. 2, held that corporate shares owned by

other family members cannot be attributed to an individual family member for purposes of

determining whether the individual family member's shares should be valued as a controlling

interest in the corporation.

SSE01WM -104-

For purposes of determining the fair market value of the gifts of closely held interest in a

family enterprise, the identity and intentions of the recipient of that interest are irrelevant. The

standard is an objective test using hypothetical buyers and sellers in the marketplace, and is not a

personalized one which envisions a particular buyer and seller.111 Thus, family relationships are

ignored, and the ownership of a controlling interest among a family’s members when each

ownership interest is attributed to the others is also ignored.

In determining the value for gift and estate tax purposes of any asset that is transferred, the

legal rights and interests inherent in that property must first be determined under state law. After

that determination is made, the federal tax law then takes over to determine how such rights and

interests will be taxed.112 In its legislative history to various revenue acts, Congress has endorsed

these principles, which had been developed under case law. For instance, the reports to the 1948

changes in the estate taxation of community property provide that those changes restore the rule

by which estate and gift tax liabilities are to depend upon the ownership of property under state

law.113

An excellent synopsis of the relevant case law and authorities for the proposition that state

law controls in determining the nature of the legal interest that is transferred for estate tax

purposes (in particular, a partnership interest) is found in a brief filed by the government in a Fifth

Circuit Court case.114 The case concerned the estate taxation of a Louisiana partnership interest.

The Justice Department, in one of its briefs in that case, provided that synopsis, which the Court

quoted in its opinion:

It is now well established that state law is determinative of the rights and

interests in property subject to federal estate taxation. In Morgan v.

Commissioner, 309 U.S. 78 [626], 60 S. Ct. 424, 84 L. Ed. 585 (1940), the

Supreme Court said (p. 80): ‘State law creates legal interests and rights. The

federal revenue acts designate what interests or rights, so created, shall be taxed.’

Estate of Rogers v. Commissioner, 320 U.S. 410, 414, 64 S. Ct. 172, 88 L. Ed. 134

(1943); United States v. Dallas Nat. Bank, 152 F.2d 582 (C.A. 5th 1945); Smith’s

Estate v. Commissioner, 140 F.2d 759 (C.A. 3d 1944). See Aquilino v. United

States, 363 U.S. 509, 513, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960);

111 See Minahan v. Commissioner, 88 T.C. 492 (1987) (ordering litigation costs assessed against the IRS for

continuing to litigate this issue).

112 See United States v. Bess, 357 U.S. 51 (1958); Morgan v. Commissioner, 309 U.S. 78 (1940).

113 See H. REP. NO. 2543, 83rd Cong. 2nd Sess., 58-67 (1954); H.R. REP. NO. 1274, 80th Cong. 2nd Sess., 4

(1948-1 C.B. 241, 243); S. REP. NO. 1013, 80th Cong., 2nd Sess., 5 (1948-1 C.B. 285, 288) where the Committee

Reports on the 1948 changes in the estate taxation of community property states: “Generally, this restores the rule by

which estate and gift tax liabilities are dependent upon the ownership of property under state law.” See also the

reports of the Revenue Act of 1932 that define “property” to include “every species of right or interest protected by

law and having an exchangeable value.” H.R. REP. NO. 708, 72nd Cong., 1st Sess., 27-28 (1932); S. REP. NO. 665,

72nd Cong., 1st Sess., 39 (1932).

114 Aldrich v. United States, 346 F.2d. 37 (5th Cir. 1965).

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Commissioner v. Chase Manhattan Bank, supra [259 F.2d 231 (5th Cir. 1958)], p.

249; United States v. Hils (C.A. 5th 1963) [318 F.2d 56]. * * *

The courts must determine the substance of the state property law

provisions and apply the estate tax provisions to the property interests so

determined.115

Thus, among the relevant considerations in connection with determining the gift or estate

tax value of a transferred partnership interest, or minority position in a corporation, are the

liquidation restrictions and voting restrictions that are inherent under the default state law rules.

The IRS argued before passage of Chapter 14 that dissolution and withdrawal rights

possessed by a general partner would or could be transferred by that general partner’s estate and,

thus, would be a key relevant fact considered by a hypothetical willing buyer. That argument was

also rejected by the courts. In Estate of Watts v. Commissioner,116 (a case decided before passage

of IRC Sec. 2704(b)(4)) both the Tax Court and the Eleventh Circuit allowed an 85% discount to

liquidation value even though the decedent was a general partner who enjoyed, under applicable

Oregon law, full dissolution rights during her life. Both courts reasoned that the transfer value of

the partnership interest was what a hypothetical willing buyer would pay based upon his

expectations as to whether or not the family would want the partnership to continue to exist after

his purchase. However, the Eleventh Circuit reasoned that this was because the hypothetical

willing buyer would only be an assignee.

b. Congress Has Never Supported a Change in The Above Case Law

and Made it Clear when It Passed Chapter 14 (Including IRC Sec.

2704(b)(4)) In 1990 That Chapter 14 Was To Be Interpreted in a

Manner Consistent With Existing Case Law.

In the fall of 1987, the House of Representatives, in its Revenue Bill of 1987, passed

legislation that would have overturned the above case law and eliminated minority and other

discounts then established by case law for purposes of valuing closely held corporations and

partnerships.117 On the other hand, the Senate Finance Committee advocated for a narrower fix

that would prevent estate “freezes” using preferred stock. The Senate proposed to leave alone the

valuation of common stock in family companies without preferred stock. Because the two

Committees exchanged published “offers,” their respective positions are known. The House cut

back its family attribution rule so much that it would apply only when the two spouses were the

only owners of the business or real estate. The Senate rejected even this very narrow family

attribution rule. Congress eventually agreed to enact only the Senate’s “anti-estate freeze”

provision for preferred stock as a new IRC Sec. 2036(c). The legislative history with respect to

115

Id. at 38, 39.

116 823 F.2d 483 (11th Cir. 1987), aff’g 51 T.C.M. 60.

117 H.R. REP. NO. 100-3545, at 1041-1044 (1987).

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IRC Sec. 2036(c) made it clear that Congress was not targeting entity discounts with the passage

of IRC Sec. 2036(c).118 For instance, the House Report made it clear that IRC Sec. 2036(c) did not

change the law with respect to the valuation of pro rata corporations and partnerships: “[t]hus,

section 2036(c) does not apply if the transferor retains an undivided interest in property, i.e., a

fractional or percentage share of each and every interest in the property.”119

However, when IRC Sec. 2036(c) was added to limit estate freezes it was heavily

criticized, including significant criticism by the author of this paper and others.120 Understanding

the history of Chapter 14 can be a challenge, because the statute went through five published

iterations, many followed by public hearings addressing the drafts. The initial “Discussion

Draft”,121 the “House bill”,122 the “Senate bill”,123 the “Compromise bill”124 reflecting the tentative

agreement between the House and Senate and, finally, the “Conference Agreement”.125 Each of

these iterations of Chapter 14 reflected a hearing with hundreds of pages of testimony and many

negotiations among Congressional staff, Treasury and tax practitioners.

Commentators were not the only persons who had concluded by 1990 that IRC Sec.

2036(c) exemplified poor tax policy, and that estate tax inclusion under IRC Sec. 2036 was not the

right solution to the estate freeze problem. Several prominent Republican Senators felt this way.

What is perhaps noteworthy is that several powerful Democrat Senators felt the same way. Thus,

the repeal of IRC Sec. 2036(c) enjoyed rare bi-partisan consensus.126

In 1990 when Congress repealed the failed IRC Sec. 2036(c) and replaced it with a new

Chapter 14, it made clear that the compromise that originally produced IRC Sec. 2036(c) required

it to reject any family attribution rule and protect traditional minority and lack of marketability

discounts in family companies. Because Congress considered Chapter 14 to be a replacement of

IRC Sec. 2036(c), Congress never revisited -- in any of these five statutory iterations -- the

original compromise rejecting family attribution and preserving valuation discounts. Moreover,

118 H. R. REP. NO. 100-495, at 995 (1987).

119

H.R. REP. NO. 100-795, at 423 (1988).

120 “The Legacy of IRC Section 2036(c): Saving The Closely Held Business After Congress Made

‘Enterprise’ A Dirty Word.” S. Stacy Eastland, Real Property Probate and Trust Journal, Volume 24, Number 3, Fall

1989. See Dees, Section 2036(c): The Monster That Ate Estate Planning And Installment Sales, Buy-Sells, Options

Employment Contacts and Leases, 66 Taxes 876 1988).

121 House Ways & Means Committee Press Release No. 28 (March 22, 1990).

122 H.R. 5425 introduced by Rep. Rostenkowski, August 1, 1990.

123 S. 3113 introduced by Sens. Bentsen, Boren and Daschle, September 26, 1990.

124 IRC Secs. 7209 and 7210 of Omnibus Reconciliation Bill passed by the Senate, so called because the

Senate Finance Committee version reflected a tentative agreement with the House staff.

125 Chapter 14 enacted as part of the Revenue Reconciliation Act of 1990 (hereinafter RRA ’90) [IRC Sec.

11602 of the RRA ’90].

126 Congressional Record 101

st Congress S. 3113: pg. 1-4 (October 17, 1990).

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Congress was not shy in expressing its intention to preserve traditional valuation discounts in the

legislative history of Chapter 14. Congress was not satisfied with merely expressing its intent to

preserve traditional valuation discounts; it restricted the IRS from discriminating against family

members in family owned businesses through the use of any variation of the family attribution

rule, except when Chapter 14 specifically requires the adverse treatment of family member

owners. Among the reasons cited by the Senate in its legislative history were the following:

The [Senate Finance] committee believes that an across-the-board inclusion

rule [application of Section 2036(a)] is an inappropriate and unnecessary approach

to the valuation problems associated with estate freezes. The committee believes

that the amount of any tax on a gift should be determined at the time of the transfer

and not upon the death of the transferor . . . . In developing a replacement for

current section 2036(c) the committee sought to accomplish several goals: (1) to

provide a well defined and administrable set of rules; (2) to allow business owners

who are not abusing the transfer tax system to freely engage in standard intra-family

transactions without being subject to severe transfer tax consequences; and (3) to

deter abuse by making unfavorable assumptions regarding certain retained rights.127

Congress adopted the suggestion of numerous commentators and approached the reform

with respect to inclusion of partnership interest and corporate interest as a valuation problem. It

reaffirmed the traditional inclusion and taxation of partnership interests, in which part of the

partnership is held in preferred form, under IRC Secs. 2511 and 2033. Those sections were

modified, however, through the passage of new valuation rules under Chapter 14.

The legislative history in enacting the new valuation rules made it clear that Congress,

once again, was comfortable with existing case law treating proportionately held (pro rata stock

ownership or partnership ownership) closely held businesses owned by family members the same

way as closely held businesses not owned by family members with respect to ignoring family

attribution for valuation purposes and determining the legal rights of any transferred interest

under the relevant state law.

The Senate Report on the bill made it clear that the bill was not to affect the discounts

associated with creating an entity, including pro rata partnerships or corporations that do not have

a senior equity interest:

The value of property transferred by gift or includable in the decedent’s

gross estate generally is its fair market value at the time of the gift or death. Fair

market value is the price at which the property would change hands between a

willing buyer and willing seller, neither being under any compulsion to buy or sell

and both having reasonable knowledge of relevant facts (Treas. Reg.

§20.2031-1(b)). This standard looks to the value of the property to a hypothetical

127 Informal Senate report accompanying the Revenue Reconciliation Bill of 1990 (S. 3209) as printed in the

Oct. 18, 1990, Congressional Record, vol. 136, s. 15679 (Daily Edition) (emphasis added).

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seller and buyer, not the actual parties to the transfer. Accordingly, courts generally

have refused to consider familiar relationships among co-owners in valuing

property. For example, courts allow corporate stock to be discounted to reflect

minority ownership even when related persons together own most or all of the

underlying stock.

. . . .

The bill does not affect minority discounts or other discounts available

under present law.

. . . .

. . . the bill does not affect the valuation of a gift of a partnership interest if

all interests in the partnership share equally in all items of income, deduction, loss

and gain in the same proportion (i.e., straight-up allocations).128

Congress intended for Chapter 14 to provide: “a well defined and administrable set of

rules” that would “deter abuse by making unfavorable assumptions regarding certain retained

rights”. Chapter 14 was not intended to prevent business owners from engaging “in standard

intra-family transactions”.

The legislative history of Chapter 14 clearly preserves traditional valuation discounts for

minority interest and lack of marketability for transfer tax purposes and prohibits a family

attribution rule. IRC Sec. 2704(b) is part of Chapter 14. Therefore, in the absence of additional

Congressional action expressing a different intent, any regulations under IRC Sec. 2704(b) must

preserve minority and lack of marketability discounts and must not impose a family attribution

rule beyond those few specific rules Congress included in Chapter 14.

Thus, the origin and purpose of Chapter 14 (including IRC Sec. 2704(b)(4) for

proportionately held family enterprises is not to enact a general family attribution rule or to

change the process of first identifying how an interest is treated under state law and then applying

Federal tax law. Of course, that is not to say that it did not have a distinctive impact on certain

family transactions. The new rules applied specifically to transfers to, and interests retained by,

family members, with the latter term given specific (and sometimes differing) definitions. But

those rules targeted specific transfers defined in the statute; those rules did not enact a general

rule of family attribution, or to “back door” family attribution treatment by another means, or negate

the important role state property law plays in transfer taxation.

128 136 CONG. REC. § 15679, 15681 (October 18, 1990) (emphasis added).

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(1) What Congress Was Concerned About When it Replaced

IRC Sec. 2036(c) With Chapter 14 Were Provisions That

Could Be Placed in the Organizational Documents of a

Family Enterprise That Would Lower the Value of a

Transferred Interest in a Family Enterprise That Would

Typically Not Be Found in Either Non-Family Enterprise

Organizational Documents or Under Default State Property

Law Provisions.

The remedy Congress employed was to disregard, for valuation purposes, the provisions

in organizational documents that would generally not be found in non-family business

organizational documents. For instance, certain put rights of senior equity interests are

disregarded (See IRC Sec. 2701), certain buy-sell and assignment provisions are disregarded (See

IRC Sec. 2703) and certain liquidation restrictions are disregarded (See IRC Sec. 2704). If the

entity is family-controlled, IRC Sec. 2704(b) disregards an “applicable restriction” on liquidation

(the definition of application restriction is discussed below). Except for the specific provisions

that are disregarded, interests in family businesses are to be valued the same way as non-family

businesses without any special valuation premiums because of family attribution.

Congress did not provide for substitute provisions for the disregarded provisions in either

the statutes of Chapter 14 (including IRC Sec. 2704(b)) or in its documented legislative history.

Nor did Congress give the IRS the power to substitute provisions for the disregarded provisions.

In particular, Congress did not provide “substitute” provisions for the “disregarded” provisions

that would make the valuation of minority interests in a family business the same as if family

attribution applied.

The origin and intent of IRC Sec. 2704(b) was only to disregard liquidation provisions and

other provisions of the organizational documents that lowered the value of interests in a family

business for transfer tax purposes below what would occur under state law if those provisions

were not in the documents. All other provisions of the organizational documents for a family

business are to remain and are to be considered in valuing interests for transfer tax purposes, as are

the provisions of applicable state law. Please see Treas. Reg. §25.2704-2(c).

(2) If Regulations Under IRC Sec. 2704(b) Reinstate Safe

Harbors, That Would Be a Repeat of the Failures of IRC

Sec. 2036(c), Whose Repeal Was a Key Origin and Purpose

of Chapter 14.

The reported IRC Sec. 2704(b) proposed regulations would represent a failure of

institutional memory by Treasury and the IRS that would threaten to repeat the waste of resources

caused by IRC Sec. 2036(c). The Greenbook Proposal discusses providing “safe harbors” from

the adverse impact of IRC Sec. 2704(b) in future regulations. Safe harbors sound harmless, but

experience shows they are no substitute for fixing a regulations conceptual problems.

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Congress enacted a series of “safe harbors” that if complied with would exempt a

transaction from IRC Sec. 2036(c).129 The safe harbors covered trusts, debt, annuities, loans,

preferred stock, compensation arrangements and leases, which IRC Sec. 2036(c) had been

interpreted as reaching. If the taxpayer followed the many technical rules under the safe harbors,

they need not worry about estate inclusion. Although IRC Sec. 2036(c) applied to a myriad of

business and estate planning transactions, under the safe harbors family members were allowed

only one way to do each transaction safely. Traditionally it would have been sufficient to have an

arrangement with arms-length terms to escape any gift tax consequences. The safe harbors

required arms-length, PLUS a whole series of technical requirements. If a taxpayer failed to

comply with any one requirement of the safe harbor, it would not matter whether the arrangement

had the same terms as every other such arrangement on Earth. As with the family attribution rule,

the relationships between family members and non-family members could be exactly the same,

but the transfer tax imposed on the family relationship could be many times greater.

Congress abolished the use of safe harbors when it repealed IRC Sec. 2036(c) and

replaced it with Chapter 14, which generally allows family business owners engaging with other

family members to avoid its application when the terms are arms-length.

c. Shortly After the Passage of Chapter 14, Including IRC Sec.

2704(b)(4), When the IRS Institutional Memory of the Origin and

Purpose of These Statutes Was Fresh, the IRS Consistently

Recognized That Chapter 14 Did Not Affect the Above Case Law.

(1) The Regulations Originally Proposed under IRC Sec.

2704(b) Protected Traditional Valuation Discounts.

The most obvious interpretation of IRC Sec. 2704(b) was that it had no application,

because it referred to restrictions on liquidation of the entity. Such restrictions do not exist. This

129 Richard Dee’s Testimony S. Hrg. 101-380 at p. 89 described the IRC Sec. 2036(c) safe harbors:

The safe harbors were intended to allow certainty in business transactions without the need to

rationalize the statute and its legislative history. The committee reports state that no presumption

is to be drawn that the existence of safe harbors imply the application of Section 2036(c) to other

business transactions outside a safe harbor. Thus the question of the scope of Section 2036(c) was

ducked in favor of ‘cookie cutter’ estate and business plans. More of the same is promised as a

45-page notice excepting even more transactions from the section has been promised by the

Treasury for more than a year. This process will continue indefinitely unless Congress repeals

Section 2036(c) and its over-broad, general language.

This approach to narrowing the application of Section 2036(c) is the equivalent of me telling,

someone how to get to my house by describing everywhere in America that I don’t live. No matter

how well traveled I am I will leave something out. And the people who draft these safe harbors are

not well traveled in the Business World. A ‘safe harbor’ sounds like a friendly, inviting, well-lit

port of call. A ‘safe harbor’ under Section 2036(c) is more like a rocky fjord or a slippery sandbar.

SSE01WM -111-

interpretation of IRC Sec. 2704(b) would have meant that it had no application at all.130 As the

Supreme Court recently observed, an interpretation that would render a statute meaningless

indeed would be a strange interpretation.131 Therefore, that narrow interpretation – despite fitting

the actual language most closely – was unlikely to ever be adopted.

On the other hand, if IRC Sec. 2704(b) were interpreted broadly, IRC Sec.

2704(b)(2)(B)(ii) could mean equity in any entirely family owned entity would need to be valued

for transfer tax purposes as if the entity were to be liquidated. All of the owners of an entity,

acting collectively, always can agree to its liquidation. Such a broad interpretation would

contradict Congressional intent to limit family attribution and to preserve traditional discounts for

minority interest and lack of marketability.132

Neither of the two most obvious interpretations of IRC Sec. 2704(b) would make sense.

The question for the government, therefore, was how to interpret IRC Sec. 2704(b) in a

meaningful manner that would not contradict the statute. The answer came in regulations:133

(b) Applicable restriction defined. An applicable restriction is a limitation on

the ability to liquidate the entity (in whole or in part) that is more restrictive than

the limitations that would apply under the State law generally applicable to the

entity in the absence of the restriction.

This regulation threaded the needle between the two most obvious interpretations of IRC

Sec. 2704(b). First, the regulations made the statute meaningful by referring to a “limitation on

the ability to liquidate the entity,” rather than a restriction “which effectively limits the ability of

the corporation or partnership to liquidate.” The regulation must refer to “a limitation on the”

owners’ “ability to liquidate the entity.” Second, the regulation made the statute consistent with

the legislative history by disregarding only those restrictions that were more restrictive than

default state law. The IRS treated provisions that made it more difficult to liquidate an entity than

default state law as mere “bells and whistles” that could be disregarded consistently with the other

provisions in Chapter 14.

(2) Elimination of Family Attribution in Rev. Rul. 93-12.

Under the final regulations under IRC Sec. 2704(b)(1), (2) and (3), as noted above,

Treasury and the IRS respected Congressional intent by preserving traditional valuation discounts in family owned companies. Within a year after the issuance of these final regulations under

130 See Kerr v. Comm., 113 T.C. No. 30. (Dec. 23, 1999). The Fifth Circuit used different reasoning to hold

for the taxpayer. 292 F.2d 490 (5th

Cir. 2002).

131 King v. Burwell, 576 U.S. (2015), Slip. Op. `14-114 (June 25, 2015) at p.15.

132 Congressional staff indicated informally in 1990 that they failed to understand the linkage between these

discounts and the owner’s inability to liquidate her equity interest or to force the entity to liquidate.

133 Treas. Reg. §2704-2(b).

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Chapter 14, Treasury and the IRS actually conceded in Rev. Rul. 93-12134 that family attribution

should not be applied for transfer tax valuation purposes. That ruling considered whether a

minority discount was appropriate when the owner of 100% of a corporation transferred all of his

shares equally to his five children on the same day.

Rev. Rul. 93-12 revoked Rev. Rul. 81-25,135 which had disagreed with the federal cases

overturning the IRS family attribution rule:

For estate and gift tax purposes, the IRS will follow Bright, Propstra, Andrews, and

Lee in not assuming that all voting power held by family members may be

aggregated for purposes of determining whether the transferred shares should be

valued as part of a controlling interest.

The IRS indirectly recognized again that Congress opposed family attribution when it

passed Chapter 14.

(3) Treasury Takes Extraordinary Steps in an Income Tax

Regulation to Comply with Chapter 14 Legislative History.

In 1994 Treasury finalized certain anti-abuse income tax regulations authorizing the

Secretary to disregard a partnership entity when its purposes were inconsistent with Subchapter

K.136 Despite being published under an income tax section, the final regulations originally applied

for both income and transfer tax purposes. Examples 5 and 6 in these regulations permitted a

partnership entity to be disregarded for gift tax purposes. Treasury took the unusual step of

amending the Final Regulations to limit the application of the regulations to income tax issues

and delete examples 5 and 6.

Those amended regulations went further to indirectly address whether investment

partnerships are somehow different than active business partnerships. The final regulations as

amended provide that: “Subchapter K [partnership provisions] is intended to permit taxpayers to

conduct joint business (including investment) activities through a flexible economic

arrangement without incurring an entity-level tax [emphasis added]. The parenthetical language

had not appeared in the proposed regulations, but was added in the Final Regulations in response

to comments.137

Again, Treasury and the IRS felt it necessary to comply with the origin, purpose and

legislative history of Chapter 14 even when the regulation was promulgated as part of the income

134 1993-1 C.B. 201.

135 1981-1 C.B. 187.

136 Treas. Reg. §1.701-2 in T.D. 8588 (December 29, 1994).

137 Treas. Reg. §1.702-2(a).

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tax rules. Moreover, their actions demonstrate how difficult it is for the IRS to draw lines between

active businesses and passive investment companies.

(4) The IRS in 1994, in Their Own Training Manual For

Appeals Officers and in Its Own Technical Advice

Memorandum Emphasized that Valuation Discounts Are to

be Allowed for Pro Rata Interests in Family Entities and

Are Not Affected by Passage of Chapter 14.

In the Valuation Training for Appeals Officers, issued by the IRS National Office in 1994,

the IRS stressed that valuation discounts may be allowed and there is no family attribution in

determining those discounts.138 Based on that publication, the IRS National Office in 1994 agreed

that even after passage of Chapter 14 and IRC Sec. 2704(b) family attribution was generally

irrelevant for determining value under transfer tax law, and that valuation discounts for lack of

control and lack of marketability are to be applied in valuing an interest in a closely held family

enterprise.

Also, in a technical advice memorandum issued in 1994,139 the IRS held that the value of a

donor’s gift of 100% of corporate stock in equal shares to each of his 11 children was determined

by considering each gift separately and not by aggregating all of the donor’s holdings in the

corporation immediately prior to the gift. Whether the donor owned a controlling interest prior to

the transfer and whether the donees were family members or various third parties were not

determining factors in valuing each block of stock transferred to a donee or in deciding whether a

separate gift was subject to a minority interest discount.

2. Not Only Would Regulations Under IRC Sec. 2704(b)(4) That Take the

Form of the Greenbook Proposal Violate the Origin and Purpose of IRC

Sec. 2704(b), Those Regulations Would Also Be Manifestly Contrary to

the Language of IRC Sec. 2704(b)(4).

As noted above, when the Tax Court found in Walton that the example in the Treasury

Regulations was “manifestly contrary to the statute [IRC Sec. 2702]” the court found the

regulation did not expressly contradict the statutory language, but found it violated the statute’s

origin and purpose. In addition to violating the origin and purpose of IRC Sec. 2704(b) (see the

discussion in Section VIII C 1 above), if the regulations under IRC Sec. 2704(b)(4) take the form

of the Greenbook Proposal, those regulations may expressly contradict the statutory language of

IRC Sec. 2704(b)(4). Under the Greenbook Proposal, state statutory and common law would not

necessarily provide the substitute for any disregarded provision in an organizational document.

Rather, the IRS would be authorized to create new default provisions, which are probably not

138 See Valuation Training for Appeals Officers (1994) (issued by the Service National Office), which

stresses the hypothetical willing buyer and seller, and states unequivocally that “it is irrelevant who are the real seller

and buyer.”

139 Tech. Adv. Mem. 94-49-001 (Mar. 11, 1994).

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found in state statutory and common law, to substitute for the disregarded provisions. The IRS

then would value transferred interests in family companies as if the organizational documents as

rewritten by the IRS governed the interests, rather than the terms written by the owners or default

provisions enacted by state legislatures. In other words, for valuation purposes the IRS could

disregard not only restrictions in the entity’s organizational documents, but also restrictions

imposed by state law. As discussed below, this would directly violate IRC Sec. 2704(b)(3)(B).

a. Certain of the IRC Sec. 2704(b)(4) Regulations, if They Take the

Form of the Greenbook Proposal, Will Apply to Restrictions

Already Described and Covered Under Other Provisions of Chapter

14; According to the Statutory Language of IRC Sec. 2704(b)(4)

the Regulations Under That Statute May Only Apply to

Restrictions Not Otherwise Described and Covered Under Chapter

14.

“Other restrictions” as it is used in IRC Sec. 2704(b)(4) should refer to restrictions that are

not otherwise described under Chapter 14, which also reduces the value of the transferred

property below what the value would be absent the restriction. It must be a restriction other than:

(i) any restriction contained in a partnership agreement, articles of incorporation,

corporate bylaws, a shareholder’s agreement, or is implicit in the capital

structure of the entity, or any other agreement that allows the acquisition or

use of the transferred interest in an entity at a price less than fair market value

(determined without regard to the restriction);140 or

(ii) any restriction on the [owner’s] ability to liquidate the entity (in whole or in

part), which affects the value of a transferred interest in an entity.141

The above restrictions were specifically described and dealt with by Congress. The fact

that Congress provided exceptions to the above restrictions, or mitigated the effect of those

restrictions, does not change the proposition that Congress wanted Treasury to only address “other

restrictions” in its regulations under IRC Sec. 2704(b)(4). Congress did not give Treasury the

power to revisit its specific handling of the above restrictions.

The Greenbook Proposal states that the IRS may disregard restrictions on “a holder’s right

to liquidate.” However, certain liquidation restrictions are already clearly described in IRS Sec.

2704(b)(1), (2) and (3) and are, thus, not to be covered by IRC Sec. 2704(b)(4) because that statute

only applies to “other restrictions.”

For instance, any regulation under IRC Sec. 2704(b)(4) may not cover any restriction

“which effectively limits the ability of the corporation or partnership to liquidate, and . . . the

140 See IRC Sec. 2703; Treas Reg. §25.2703-1(a)(2).

141 See IRC Sec. 2704(b)1, 2, 3; Treas Reg. §25.2704-2(b).

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transferor or any member of the transferor’s family, either alone or collectively, has the right to

remove, in whole or in part the restriction.” See IRC Sec. 2704(b)(2). Thus, if a family

partnership agreement provides that the partnership shall last 50 years and it requires a unanimous

vote of the partners to remove that restriction, that restriction is not within the scope of IRC Sec.

2704(b)(4), because the efficacy of that restriction, and when and in what manner it is disregarded,

is already covered in other parts of IRC Sec. 2704. See Treas. Reg. §25.2740-2(d) Example 1. If

the regulations under IRC Sec. 2704(b)(4) purport to cover liquidation restrictions that are

covered by other sections of IRC Sec. 2704(b), then those regulations are contrary to the express

statutory provisions of IRC Sec. 2704(b)(4).

IRC Sec. 2704(b)(2)(A) in unclear whether it applies to a restriction on an individual

partner’s right to withdraw from the partnership (as opposed to a restriction on liquidation of the

entire partnership), and is therefore already disregarded as an “applicable restriction” if it is more

restrictive than state law. If so, it is not an “other restriction” that can be addressed under IRC Sec.

2704(b)(4).142 The issue is not of great significance at present because most state statutes strictly

curtail a limited partner’s right to withdraw from the partnership, but would be significant if the

proposed regulations addressed such a restriction and disregarded state law.

Because IRC Sec. 2703, which is part of Chapter 14, addresses the transfer tax effect of

transfer restrictions, “other restrictions” cannot refer to transfer restrictions any more than it can

refer to liquidation restrictions. The reference in the Greenbook Proposal to ignoring restrictions

on the transfer of rights in a partnership should be tested under IRC Sec. 2703, not IRC Sec.

2704(b). Unlike IRC Sec. 2704(b), IRC Sec. 2703 recognizes for valuation purposes terms that

are comparable to those in arms-length agreements among non-family owners. Because IRC Sec.

2704 can be used to disregard any specified restriction in agreements for a wholly owned family

business, the IRS would prefer to apply IRC Sec. 2704(b). However, IRC Sec. 2704(b)(4) does

not authorize regulations that apply to restrictions covered elsewhere in Chapter 14.

b. IRC Sec. 2704(b) Only Empowers the IRS to Disregard Certain

Restrictions in Family Entity Organizational Documents Not to

Replace Those Disregarded Provisions with IRS-Invented

Alternatives.

IRC Sec. 2704(b)(1) and Sec. 2704(b)(4) have identical operative language: each provides

that a restriction “shall be disregarded.” Neither section gives the IRS the power to “substitute”

alternative language to take the place of the disregarded restriction. Instead, the organizational

documents shall be read as if they omitted the restriction. As noted above, unless there is a

contrary provision in the federal statute, the Supreme Court has taken the position that

142

While the Tax Court has held that a restriction on a partner’s right to withdraw is not an applicable

restriction, no appellate court has yet done so, and the Tax Court position may be questioned. Kerr v. Comm’r, 113

T.C. 449 (1999), aff’d. on other grounds, 292 F.3d 490 (5th Cir. 2002); Estate of Harper v. Comm’r, 79 TCM 2232

, T.C. Memo 2000-202; Estate of Jones v. Comm’r., 116 T.C. 121 (2001). See also Knight v. Commissioner, 115 T.C.

506 (2000). The Kerr case is discussed in Section VIII E of the paper.

SSE01WM -116-

for transfer tax purposes a state’s statutes and common law determine how the agreement is to

apply absent the “restriction” in the agreement. Indeed, the contemporaneous regulation written

under Treas. Reg. §25.2704-2(c) on January 28, 1992 uses that remedy:

(c) Effect of disregarding an applicable restriction.—If an applicable restriction

is disregarded under this section, the transferred interest is valued as if the

restriction does not exist and as if the rights of the transferor are determined under

the State law that would apply but for the restriction.

If the new regulations take the form of the Greenbook Proposal stated below, the IRS will

have the power under those regulations to substitute provisions for the disregarded provisions of

the organizational documents that may not be found in the default state property law:

Specifically, the transferred interest would be valued by substituting for the

disregarded restrictions certain assumptions to be specified in regulations.

Disregarded restrictions would include limitations on a holder’s right to liquidate

that holder’s interest that are more restrictive than a standard to be identified in

regulations.

It would appear that the substituted assumptions or standards will be different than state

statutory or common law; otherwise, no change in the regulations would be necessary. In effect,

this would treat restrictions imposed by state law in the same manner as “applicable” restrictions,

in direct violation of IRC Sec. 2704(b)(3)(B), which provides that “[t]he term ‘applicable

restriction’ shall not include . . . any restriction imposed, or required to be imposed, by any Federal

or State law.”

Without enactment of the statute contemplated by the Greenbook Proposal, IRC Sec.

2704(b)(4) is clearly inadequate to authorize substitutions for disregarded provisions. Congress

did not provide for substitute provisions for the disregarded provisions in either the statutes of

Chapter 14 (including IRC Sec. 2704(b)) or in its extensive legislative history. In particular,

Congress would not, and did not, authorize the IRS to invent “substitute” provisions for the

“disregarded” provisions that would make the valuation of minority interests in a family business

the same as if family attribution applied.

c. Regulations Under IRC Sec. 2704(b) That Track the Greenbook

Proposal Would Redefine Family for Purposes of IRC Sec.

2704(b), Which It Cannot Do.

IRC Sec. 2704(b) applies only to restrictions that would “lapse” or that may be removed

by the “family.” Family is specifically defined:143

143 IRC Sec. 2704(c)(2).

SSE01WM -117-

(2) Member of the family. The term "member of the family" means, with

respect to any individual-

(A) such individual's spouse,

(B) any ancestor or lineal descendant of such individual or such individual's

spouse,

(C) any brother or sister of the individual, and

(D) any spouse of any individual described in subparagraph (B) or (C) .

The Greenbook Proposal would have authorized regulations to redefine the meaning of

family by allowing certain owners to be ignored. The disregarded owners might be charities that

would be presumed to oppose liquidation or other owners with minor ownership interests.

We are unaware of any regulations that rewrite the meaning of family when the statute

specifically defines the term in the statute. Such regulations would necessarily contradict the

statute and, therefore, be invalid without the statutory authorization assumed by the Greenbook

Proposal.

d. Under IRC Sec. 2704(b)(4) the Only Restrictions That May Be

Disregarded Are Those Restrictions That Have the “Effect of

Reducing the Value of the Transferred Interest” Below What the

Transferred Interest Value Would Be Even if the Restriction Was

Not in the Organizational Documents.

If regulations under IRC Sec. 2704(b)(4) are consistent with the Greenbook Proposal

certain of those regulations will disregard restrictions, even if the value is not reduced because of

those restrictions, which is contrary to the express statutory provision of IRC Sec. 2704(b)(4).

Certain restrictions may exist under state statutory and common law that are consistent with the

written liquidation restrictions in an organizational document. Their removal from the

organizational document would not reduce the value of the transferred interest, because of the

operation of state property law.

For instance, the limited partnership agreement may mandate if the partnership is not

sooner liquidated it must be liquidated in 40 years. That provision is not a liquidation restriction,

it is the opposite. That provision mandates liquidation under a time certain (40 years). The

partnership agreement may also provide that a limited partner may not withdraw until the

partnership liquidates. While that provision is a liquidation restriction, it may be a restriction that

would apply anyway, if the agreement was silent on that issue, because of operation of state law

for a term of years limited partnership agreement. As a consequence, that liquidation restriction in

the organizational documents, may not be disregarded under IRC Sec. 2704(b)(4), because its

removal would not have any effect on the transfer value of a limited partnership interest under

state law.

SSE01WM -118-

Another example would be a provision in a partnership agreement consistent with state

property law that allows the partners to admit a transferee as one of their partners, but does not

mandate that the transferee to be so admitted. It would appear the Greenbook Proposal would

give the IRS the power to disregard that provision:

A disregarded restriction also would include any limitation on a transferee’s ability

to be admitted as a full partner.

If the regulations are consistent with that proposal, then those regulations would be

contrary to the express statutory provision that requires that the absence of the disregarded

provision in the organizational documents reduce the value of the transferred interest. Even if that

provision was absent from the partnership agreement the value of the transferred interest would

not be affected because of the operation of state property law, which allows partners to choose

their own partners.

D. Even if Certain Restrictions Are Disregarded in an Organizational Document, and

Even if Other Provisions Are Substituted For the Disregarded Provisions, the

Valuation of Transferred Interests in a Family Holding Company May Not

Change, if the Courts Apply the Non-marketable Investment Company Evaluation

Method.144

Under this method of valuation the fair market value of transferred interests in closely held

holding companies is determined by estimating the cost of capital that reflects the greater risk

associated with the transferred interest in the closely held enterprise in comparison to the investor

holding a proportionate share of the assets of the enterprise. This method of valuation does not

use marketability and minority discounts from so-called benchmark studies. Instead, the closely

held nature of the transferred interest is treated as a liquidity investment risk that is embodied in

the cost of capital for the transferred interest. This method determines what a willing buyer would

pay for the transferred interest taking into account liquidity investment risks associated with the

expected returns.

E. Because of the Uncertainty About the Enforceability of Regulations Under IRC

Sec. 2704(b)(4), and Even if the Regulations Are Held to Be Valid, the Uncertainty

of the Application of the Lack of Liquidity Valuation Discount, the Taxpayer

Should Consider Using the “Kerr” Strategy, or a Similar Strategy, to Protect

Against a Significant Gift Tax if the Courts Uphold the Regulations and if the

Courts Also Do Not Apply the Lack of Liquidity Discount.

The Greenbook Proposal would have applied “to transfers after the date of enactment”.

Hopefully, proposed regulations under IRC Sec. 2504(b)(4), which are sure to be controversial

144

Frazier, William H. “Cost of Capital of Family Holding Company Interests.” Cost of Capital, Fifth

Edition. Ed. Shannon P. Pratt, Ed. Roger J. Grabowski. Hoboken, New Jersey: John Wiley & Sons, Inc. 2014.

630-649.

SSE01WM -119-

and are “legislative” in nature, will be made effective only upon issuance of final regulations, but

that is not certain. Even after they become final, as the above discussion demonstrates, there may

be uncertainty about their scope and validity. Taxpayers will need ways to cope with the

uncertainty.

As noted above (see Section VIII C 1 c (4) of this paper), fresh from the enactment of

Chapter 14, the IRS initially took the view that Chapter 14 did not affect the value of closely held

FLPs and FLLCs that were held in pro rata form of ownership. However, beginning in early 1997,

the IRS embarked on a frontal assault on the use of FLPs and other closely held entities for estate

planning purposes through the issuance of technical advice memoranda and private letter

rulings.145 In these pronouncements, the National Office of the IRS took the position that an

interest in a closely held entity can be valued for transfer tax purposes based on the pro rata net

asset value of the interest in the entity transferred, essentially disregarding the existence of the

entity. One of the arguments raised by the IRS in each of these pronouncements was that under

IRC Sec. 2704(b) transferred partnership interests can be valued without regard to any restrictions

on liquidation or withdrawal contained in the partnership agreement or provided under state law.

The IRS reversal on its view of the application of IRC Sec. 2704(b) was repudiated by the

full Tax Court in Kerr v. Commissioner,146 which is the first opinion addressing whether the IRS’s

broad reinterpretation of Chapter 14 was consistent with the courts’ understanding of Congress’

intent.

The Kerrs, in filing their federal gift tax returns for 1994 and 1995, computed the fair

market value of the interests that were transferred to grantor annuity trusts (GRATs), which

complied with IRC Sec. 2702, by applying valuation adjustments for minority interest and lack of

marketability. The IRS, however, determined that IRC Sec. 2704(b) barred any adjustment for

minority interest and lack of marketability in computing the fair market value of the partnership

interests. The IRS claimed that the provisions of the partnership agreements that restricted the

right of a limited partner to liquidate his limited partnership interest were “applicable restrictions”

which should be disregarded in determining the fair market value of the interests transferred.

The IRS’s argument had two components. First, the IRS claimed that the provisions of the

partnership agreements which stated that the partnership shall liquidate upon the earlier of

December 31, 2043, or the consent of all the partners, were restrictions on the liquidation of the

partnerships that constitute “applicable restrictions” within the meaning of IRC Sec. 2704(b) that

must be disregarded in valuing the interests transferred. Second, the IRS claimed that the

provisions of the partnership that restricted a limited partner’s right to withdraw from the entity

were “applicable restrictions” that must be disregarded in valuing the interests transferred.

145 See, e.g., PLR 9736004 (June 6, 1997); PLR 9735043 (June 3, 1997); PLR 9735003 (May 8, 1997); PLR

9730004 (April 3, 1997); PLR 9725018 (March 20, 1997); PLR 9725002 (March 3, 1997); PLR 9723009

(February 24, 1997); PLR 9830803 (October 16, 1998).

146 113 T.C. No. 30 (Dec. 23, 1999). See also Kerr v. Commissioner, 292 F.3d 490 (5

th Cir. 2002), which

held IRC Sec. 2704(b) did not apply to the transferred interests on different grounds.

SSE01WM -120-

Because a limited partner in a partnership that did not have a fixed liquidation date (i.e.,

December 31, 2043) had the right to withdraw his interest under state law on six months notice,

the IRS claimed that the fair market value of the interest is equal to the proportionate pro rata net

asset value of the partnership interest transferred.

The Tax Court held that IRC Sec. 2704(b) did not apply to the valuation of the transferred

interests. The Tax Court’s analysis focused on whether the partnership agreements imposed

greater restrictions on the liquidation of the partnerships than the limitations that generally would

apply under Texas law.

The Tax Court’s holding repudiated the thrust of the IRS’s IRC Sec. 2704(b) position in

its pronouncements issued from 1997 through 2000. Regulations under IRC Sec. 2704(b)

modeled on the Greenbook Proposal would resurrect the arguments buried by the Kerr court.

Nothing suggests that the courts are any more willing today to accept a reinterpretation of IRC

Sec. 2704(b) inconsistent with the Chapter 14 legislative history simply because that

reinterpretation might be contained in new regulations, particularly when Congress has refused to

enact the statutory authority for regulations requested by the Greenbook Proposal.

However, even if the IRS had won the Kerr case, because the operation of a GRAT

provides that the annuities retained by Mr. and Mrs. Kerr would equal a certain percentage of the

assets transferred to the GRATs as finally determined for gift tax purposes, the Kerr’s would not

incur a gift tax surprise. Their disappointment would be that the GRATs would owe them more

money.

In a similar fashion, a taxpayer could first contribute and/or sell his interests in family

entities and other assets to a single member FLLC. The taxpayer could then contribute his

interests in the single member FLLC to a GRAT. See a discussion of the technique in Section III

of this paper. The taxpayer could then file a gift tax return taking the position that the regulations

under IRC Sec. 2704(b)(4) do not affect the value of the GRAT assets. If it is finally determined

that the regulations under IRC Sec. 2704(b)(4) do not apply, then the taxpayer will get the benefit

of any valuation discounts that are appropriate. Similar to Kerr, if it is finally determined that the

regulations do affect the value of the GRAT assets, the disappointment will not be a gift tax

surprise. Again, the disappointment will be that the GRAT owes greater annuity amounts to the

taxpayer.

SSE01WM -121-

This material represents the views of the Strategic Wealth Advisory Team (“SWAT”), which is part of the

Investment Management Division of Goldman Sachs. The information herein is provided solely to educate on a

variety of topics, including wealth planning, tax considerations, executive compensation, and estate, gift and

philanthropic planning. The views and opinions expressed herein may differ from the views and opinions expressed by

other departments or divisions of Goldman Sachs. While this material is based on information believed to be reliable,

no warranty is given as to its accuracy or completeness and it should not be relied upon as such. Information and

opinions provided herein are as of the date of this material only and are subject to change without notice. Tax results

may differ depending on a client’s individual positions, elections or other circumstances. This material is based on the

assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary

substantially from the examples shown herein. The examples and assumed growth rate(s) stated herein are provided

for illustrative purposes only; they do not represent a guarantee that these amounts can be achieved and no

representation is being made that any client will or is likely to achieve the results shown. Assumed growth rates are

subject to high levels of uncertainty and do not represent actual trading and, thus, may not reflect material economic

and market factors that may have an impact on actual performance. Goldman Sachs has no obligation to provide

updates to these rates. Goldman Sachs does not provide accounting, tax or legal advice to its clients and all investors

are strongly urged to consult with their own advisors before implementing any structure, investment plan or strategy.

Notwithstanding anything in this document to the contrary, and except as required to enable compliance with

applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax

structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are

provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of

any kind. Information related to amounts and rates set forth under U.S. tax laws are drawn from current public sources,

including the Internal Revenue Code of 1986, as amended, as well as regulations and other public pronouncements of

the U.S. Treasury Department and Internal Revenue Service. Such information may be subject to change without

notice. In some cases, rates may be estimated and may vary based on your particular circumstances. SWAT services

offered through Goldman, Sachs & Co. Member FINRA/SIPC. © 2015 Goldman Sachs. All rights reserved.

Mr. and Mrs. Neal Navigator 26,553,039 24,657,136 99.50%

IRS Income Tax - Direct Cost

130,285

120,983

0.49%

IRS Income Tax - Investment Opportunity Cost 3,242 3,011 0.01%

Total $26,686,566 $24,781,130 100.00%

Technique A: Contributing Assets That Are Not in Entities to a GRAT Mr. and Mrs. Neal Navigator 26,552,894 24,657,002 99.50%

Navigator Children 144 134 0.00%

IRS - Income Tax 130,285 120,983 0.49%

IRS - Investment Opportunity Costs 3,242 3,011 0.01%

Total $26,686,566 $24,781,130 100.00%

Technique B: Contribution of Non-Leveraged Entities to a GRAT Mr. and Mrs. Neal Navigator 24,217,863 22,488,693 90.75%

Navigator Children 2,335,176 2,168,443 8.75%

IRS Income Tax - Direct Cost 130,285 120,983 0.49%

IRS Income Tax - Investment Opportunity Cost 3,242 3,011 0.01%

Total $26,686,566 $24,781,130 100.00%

Technique C: Leveraged FLLC Asset Contributed to a GRAT Mr. and Mrs. Neal Navigator 18,781,789 17,440,758 70.38%

Navigator Children 7,771,250 7,216,378 29.12%

IRS Income Tax - Direct Cost 130,285 120,983 0.49%

IRS Income Tax - Investment Opportunity Cost 3,242 3,011 0.01%

Total $26,686,566 $24,781,130 100.00%

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs Mr. and Mrs. Neal Navigator 17,455,005 16,208,707 65.41%

Navigator Children 9,098,034 8,448,429 34.09%

IRS - Income Tax 130,285 120,983 0.49%

IRS - Investment Opportunity Costs 3,242 3,011 0.01%

Total $26,686,566 $24,781,130 100.00%

Schedule 1 - Scenario 1 (assets earn 2.2% annually)

Neal and Nancy Navigator Hypothetical Integrated Income and Estate Tax Plan Comparisons (Three-Year Future Values)

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative

purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Three-Year

Future Values

Present Values

(Discounted at 2.5%)

Percentage

of Total

No Further Planning

Navigator Children - - 0.00%

1

Beginning

of Year Tax

Financial & Free Income

Other Assets Income Income Growth Taxes

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

25,000,000 150,000 600,000 (200,000) (51,900)

25,498,100 152,989 611,954 (203,985) (42,434)

26,016,624 156,100 624,399 (208,133) (35,951)

25,498,100

26,016,624

26,553,039

Schedule 1 - Scenario 1 (assets earn 2.2% annually)

Neal and Nancy Navigator

No Further Planning This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative

purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Total Estimated Rate of Return 2.20%

Rate of Return Taxed at Ordinary Rates 0.60%

Rate of Return Tax Free 2.40%

Rate of Return Taxed at Capital Gains Rates -0.80%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00%

Ordinary and Health Care Tax Rate 44.60%

Mr. and Mrs. Neal Navigator

2

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Annuity

Payments

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

8,702,613

(51,900)

8,650,713

Year 2 8,650,713 51,904 207,617 (69,206) 8,702,613 (42,434) 17,501,207

Year 3 17,501,207 105,007 420,029 (140,010) 8,702,613 (35,951) 26,552,894

Schedule 1 - Scenario 1 (assets earn 2.2% annually)

Neal and Nancy Navigator

Technique A: Contributing Assets That Are Not in Entities to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

2.20% Assumptions (continued):

GRAT Annual Annuity

$8,702,613

Rate of Return Taxed at Ordinary Rates 0.60% IRS §7520 Rate 2.20%

Rate of Return Tax Free 2.40% Rate of Return Taxed at Capital Gains Rates -0.80%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00%

Ordinary and Health Care Tax Rate 44.60%

Mr. and Mrs. Neal Navigator

Three Year Grantor Retained Annuity Trust

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1

25,000,000

150,000

600,000

(200,000)

(8,702,613)

-

16,847,388

Year 2 16,847,388 101,084 404,337 (134,779) (8,702,613) - 8,515,418

Year 3 8,515,418 51,093 204,370 (68,123) (8,702,613) (144) -

Non-GST Tax Exempt Grantor Trusts Created by Neal Navigator for the Benefit of Nancy Navigator and their Descendants (Remanider of 3-Year GRAT)

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

GRAT Beneficiary

Terminates Distributions

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

-

Year 2 - - - - - - - -

Year 3 - - - - 144 - - 144

3

4

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets

Distributions

Holdco

Distributions

Cash

Annuity

Payments

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

7,200

8,668

858,132

(51,900)

822,100

Year 2 822,100 4,933 19,730 (6,577) 7,070 244,904 609,065 (42,434) 1,658,792

Year 3 1,658,792 9,953 39,811 (13,270) 6,943 491,209 350,161 (35,951) 2,507,648

Ownership

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

End of Year Ownership

GRAT &

Neal Grantor

Navigator Trust #1

28.68% 71.32%

58.38% 41.62%

90.22% 9.78%

In-Kind

Annuity

Payments

with Holdco

Units

Holdco

%

5,085,756

5,397,090

5,720,720

27.68%

29.70%

31.84%

Schedule 1 - Scenario 1 (assets earn 2.2% annually)

Neal and Nancy Navigator

Technique B: Contribution of Non-Leveraged Entities to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 2.20% Financial Assets, LP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 4.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates -0.80% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $4,926,737

Long-Term Capital Gain Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary Tax Rate 44.60%

Mr. and Mrs. Neal Navigator

Financial Assets, LP

Beginning

of Year Tax

Financial & Free

Other Assets Income Income Growth Distributions

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

18,000,000 108,000 432,000 (144,000) (720,000)

17,676,000 106,056 424,224 (141,408) (707,040)

17,357,832 104,147 416,588 (138,863) (694,313)

17,676,000

17,357,832

17,045,391

Holdco, FLLC

Beginning

of Year Tax Financial

Financial & Free Assets, LP

Other Assets Income Income Growth Distributions Distributions

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

7,000,000 42,000 168,000 (56,000) 712,800 (866,800)

7,000,000 42,000 168,000 (56,000) 699,970 (853,970)

7,000,000 42,000 168,000 (56,000) 687,370 (841,370)

7,000,000

7,000,000

7,000,000

Three Year Grantor Retained Annuity Trust

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco, FLLC

Distributions

Cash

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 858,132 (858,132) - -

Year 2 - - - - 609,065 (609,065) - -

Year 3 - - - - 350,161 (350,161) - -

5

Schedule 1 - Scenario 1 (assets earn 2.2% annually)

Neal and Nancy Navigator

Technique B: Contribution of Non-Leveraged Entities to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 2.20% Financial Assets, LP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 4.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates -0.80% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $4,926,737

Long-Term Capital Gain Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary Tax Rate 44.60%

New Non-GST Grantor Trusts #1 Created by Neal Navigator for the Benefit of Nancy Navigator and their Children (Remanider of 3-Year GRAT)

Beginning

of Year Tax

Financial & Free Holdco, FLLC Beneficiary Income

Other Assets Income Income Growth Distributions Distributions Taxes

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

- - - - - - -

- - - - - - -

- - - - - - -

-

-

-

6

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets

Distributions

Holdco

Distributions

Annuity

Payments

Note

Payments

Income

Taxe

s

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

8,000

5,175

512,331

53,519

(51,900)

527,125

Year 2 527,125 3,163 12,651 (4,217) 8,000 5,175 512,331 53,519 (42,434) 1,075,313

Year 3 1,075,313 6,452 25,808 (8,603) 3,437 5,175 512,331 53,519 (35,951) 1,637,480

Ownership

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT &

Neal Grantor

Navigator Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Schedule 1 - Scenario 1 (assets earn 2.2% annually)

Neal and Nancy Navigator

Technique C: Leveraged FLLC Asset Contributed to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 2.20% Financial Assets, FLP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 2.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates -0.80% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $512,331

Long-Term Capital Gain and Health Care Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary and Health Care Tax Rate 44.60% Intra-Family Interest Rate (short-term) - June 2014 0.32%

Mr. and Mrs. Neal Navigator

Financial Assets, LP

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Distributions

End of Year

Financial

& Other

Assets

Year 1 18,000,000 108,000 432,000 (144,000) (800,000) 17,596,000

Year 2 17,596,000 105,576 422,304 (140,768) (800,000) 17,183,112

Year 3 17,183,112 103,099 412,395 (137,465) (343,662) 17,217,478

Holdco, FLLC

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets, LP

Distributions

Note

Payments

Distributions

End of Year

Financial

& Other

Assets

Year 1 7,000,000 42,000 168,000 (56,000) 792,000 (53,519) (517,506) 7,374,975

Year 2 7,374,975 44,250 176,999 (59,000) 792,000 (53,519) (517,506) 7,758,199

Year 3 7,758,199 46,549 186,197 (62,066) 340,226 (53,519) (517,506) 7,698,080

Three Year Grantor Retained Annuity Trust

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco, FLLC

Distributions

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 512,331 (512,331) - -

Year 2 - - - - 512,331 (512,331) - -

Year 3 - - - - 512,331 (512,331) - -

7

Schedule 1 - Scenario 1 (assets earn 2.2% annually)

Neal and Nancy Navigator

Technique C: Leveraged FLLC Asset Contributed to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 2.20% Financial Assets, FLP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 2.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates -0.80% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $512,331

Long-Term Capital Gain and Health Care Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary and Health Care Tax Rate 44.60% Intra-Family Interest Rate (short-term) - June 2014 0.32%

New Non-GST Tax Exempt Grantor Trusts Created by Neal Navigator for the Benefit of Nancy Navigator and their Children (Remanider of 3-Year GRAT)

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco, FLLC

Distributions

Beneficiary

Distributions

Income

Taxe

s

End of Year

Financial

& Other

Assets

Year 1 - - - - - - - -

Year 2 - - - - - - - -

Year 3 - - - - - - - -

Note #1 Between Neal Navigator and Holdco, FLLC

for the Purchase of Non-Managing Member Interests

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 16,724,700 53,519 (53,519) 16,724,700

Year 2 16,724,700 53,519 (53,519) 16,724,700

Year 3 16,724,700 53,519 (53,519) 16,724,700

8

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets LP

Distributions

Holdco

FLLC

Distributions

Preferred

Holdco

Distributions

Growth

Holdco

Distributions

GRAT

#1 & #2

Annuity

Payments

Notes

#1 & #2

Payments

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1 - - - - 3,600 - 4,062 808 482,170 50,368 (51,900) 489,109

Year 2 489,109 2,935 11,739 (3,913) 3,607 - 4,062 808 482,170 50,368 (42,434) 998,451

Year 3 998,451 5,991 23,963 (7,988) 3,614 - 4,062 808 482,170 50,368 (35,951) 1,525,489

Ownership

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Growth Ownership

Growth

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT #1

Neal & Grantor

Navigator Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Schedule 1 - Scenario 1 (assets earn 2.2% annually)

Neal and Nancy Navigator

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

2.20%

Assumptions (continued):

Financial Assets, FLP Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Holdco, FLLC Preferred Interest $14,586,400

Rate of Return Tax Free 2.40% Holdco, FLLC Preferred Coupon 7.00%

Rate of Return Taxed at Capital Gains Rates -0.80% Holdco, FLLC Valuation Discount 30.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Preferred Holdco, FLLC Valuation Discount 20.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00% Growth Holdco, FLLC Valuation Discount 20.00%

Ordinary and Health Care Tax Rate 44.60% GRAT #1 Annual Annuity $402,145

GRAT #2 Annual Annuity $80,025

IRS §7520 Rate 2.20%

Intra-Family Interest Rate (short-term) 0.32%

Mr. and Mrs. Neal Navigator

Financial Assets, LP

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Growth

Distributions

End of Year

Financial

& Other

Assets

Year 1 18,000,000 108,000 432,000 (144,000) (360,000) 18,036,000

Year 2 18,036,000 108,216 432,864 (144,288) (360,720) 18,072,072

Year 3 18,072,072 108,432 433,730 (144,577) (361,441) 18,108,216

Holdco, FLLC

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets, LP

Distributions

Preferred

Distributions

Growth

Distributions

End of Year

Financial

& Other

Assets

Year 1 6,650,000 39,900 159,600 (53,200) 356,400 (1,021,048) - 6,131,652

Year 2 6,131,652 36,790 147,160 (49,053) 357,113 (1,021,048) - 5,602,613

Year 3 5,602,613 33,616 134,463 (44,821) 357,827 (1,021,048) - 5,062,650

Preferred Holdco, FLLC

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco

Preferred

Distributions

Note #1

Payments

Distributions

End of Year

Financial

& Other

Assets

Year 1 - - - - 1,021,048 (42,009) (406,207) 572,832

Year 2 572,832 3,437 13,748 (4,583) 1,021,048 (42,009) (406,207) 1,158,266

Year 3 1,158,266 6,950 27,798 (9,266) 1,021,048 (42,009) (406,207) 1,756,580

9

Ownership

GRAT #2

Neal & Grantor

Navigator Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco

Growth

Distributions

Note #2

Payments

Distributions

End of Year

Financial

& Other

Assets

Year 1 350,000 2,100 8,400 (2,800) - (8,360) (80,833) 268,507

Year 2 268,507 1,611 6,444 (2,148) - (8,360) (80,833) 185,222

Year 3 185,222 1,111 4,445 (1,482) - (8,360) (80,833) 100,104

Schedule 1 - Scenario 1 (assets earn 2.2% annually)

Neal and Nancy Navigator

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

2.20%

Assumptions (continued):

Financial Assets, FLP Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Holdco, FLLC Preferred Interest $14,586,400

Rate of Return Tax Free 2.40% Holdco, FLLC Preferred Coupon 7.00%

Rate of Return Taxed at Capital Gains Rates -0.80% Holdco, FLLC Valuation Discount 30.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Preferred Holdco, FLLC Valuation Discount 20.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00% Growth Holdco, FLLC Valuation Discount 20.00%

Ordinary and Health Care Tax Rate 44.60% GRAT #1 Annual Annuity $402,145

GRAT #2 Annual Annuity $80,025

IRS §7520 Rate 2.20%

Intra-Family Interest Rate (short-term) 0.32%

Growth Holdco, FLLC

Three Year Grantor Retained Annuity Trust #1

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Preferred

Holdco, FLLC

Distributions

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 402,145 (402,145) - -

Year 2 - - - - 402,145 (402,145) - -

Year 3 - - - - 402,145 (402,145) - -

Three Year Grantor Retained Annuity Trust #2

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Growth

Holdco, FLLC

Distributions

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 80,025 (80,025) - -

Year 2 - - - - 80,025 (80,025) - -

Year 3 - - - - 80,025 (80,025) - -

10

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 2,612,358 8,360 (8,360) 2,612,358

Year 2 2,612,358 8,360 (8,360) 2,612,358

Year 3 2,612,358 8,360 (8,360) 2,612,358

Schedule 1 - Scenario 1 (assets earn 2.2% annually)

Neal and Nancy Navigator

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

2.20%

Assumptions (continued):

Financial Assets, FLP Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Holdco, FLLC Preferred Interest $14,586,400

Rate of Return Tax Free 2.40% Holdco, FLLC Preferred Coupon 7.00%

Rate of Return Taxed at Capital Gains Rates -0.80% Holdco, FLLC Valuation Discount 30.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Preferred Holdco, FLLC Valuation Discount 20.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00% Growth Holdco, FLLC Valuation Discount 20.00%

Ordinary and Health Care Tax Rate 44.60% GRAT #1 Annual Annuity $402,145

GRAT #2 Annual Annuity $80,025

IRS §7520 Rate 2.20%

Intra-Family Interest Rate (short-term) 0.32%

New Non-GST Tax Exempt Grantor Trusts Created by Neal Navigator for the Benefit of Nancy Navigator and their Children (Remanider of 3-Year GRATs)

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Preferred

Holdco, FLLC

Distributions

Growth

Holdco, FLLC

Distributions

Beneficiary

Distributions

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1 - - - - - - - - -

Year 2 - - - - - - - - -

Year 3 - - - - - - - - -

Note #1 Between Neal Navigator and Preferred Holdco, FLLC Note #2 Between Neal Navigator and Growth Holdco, FLLC

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 13,127,760 42,009 (42,009) 13,127,760

Year 2 13,127,760 42,009 (42,009) 13,127,760

Year 3 13,127,760 42,009 (42,009) 13,127,760

Three-Year

Future Values

Present Values

(Discounted at 2.5%)

Percentage

of Total

No Further Planning

Mr. and Mrs. Neal Navigator 30,292,932 28,129,999 97.81%

IRS Income Tax - Direct Cost

638,888

593,271

2.06%

IRS Income Tax - Investment Opportunity Cost 39,010 36,225 0.13%

Total $30,970,831 $28,759,495 100.00%

Technique A: Contributing Assets That Are Not in Entities to a GRAT Mr. and Mrs. Neal Navigator 27,409,575 25,452,515 88.50%

Navigator Children 2,883,358 2,677,484 9.31%

IRS Income Tax - Direct Cost 638,888 593,271 2.06%

IRS Income Tax - Investment Opportunity Cost 39,010 36,225 0.13%

Total $30,970,831 $28,759,495 100.00%

Technique B: Contribution of Non-Leveraged Entities to a GRAT Mr. and Mrs. Neal Navigator 24,501,833 22,752,388 79.11%

Navigator Children 5,791,099 5,377,611 18.70%

IRS Income Tax - Direct Cost 638,888 593,271 2.06%

IRS Income Tax - Investment Opportunity Cost 39,010 36,225 0.13%

Total $30,970,831 $28,759,495 100.00%

Technique C: Leveraged FLLC Asset Contributed to a GRAT Mr. and Mrs. Neal Navigator 18,401,811 17,087,910 59.42%

Navigator Children 11,891,122 11,042,089 38.39%

IRS Income Tax - Direct Cost 638,888 593,271 2.06%

IRS Income Tax - Investment Opportunity Cost 39,010 36,225 0.13%

Total $30,970,831 $28,759,495 100.00%

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs Mr. and Mrs. Neal Navigator 17,080,466 15,860,911 55.15%

Navigator Children 13,212,466 12,269,088 42.66%

IRS Income Tax - Direct Cost 638,888 593,271 2.06%

IRS Income Tax - Investment Opportunity Cost 39,010 36,225 0.13%

Total $30,970,831 $28,759,495 100.00%

Schedule 1 - Scenario 2 (assets earn 7.4% annually)

Neal and Nancy Navigator Hypothetical Integrated Income and Estate Tax Plan Comparisons (Three-Year Future Values)

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative

purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Navigator Children - - 0.00%

11

Beginning

of Year Tax

Financial & Free Income

Other Assets Income Income Growth Taxes

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

25,000,000 150,000 600,000 1,100,000 (149,400)

26,700,600 160,204 640,814 1,174,826 (217,313)

28,459,132 170,755 683,019 1,252,202 (272,175)

26,700,600

28,459,132

30,292,932

Schedule 1 - Scenario 2 (assets earn 7.4% annually)

Neal and Nancy Navigator

No Further Planning This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative

purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Total Estimated Rate of Return 7.40%

Rate of Return Taxed at Ordinary Rates 0.60%

Rate of Return Tax Free 2.40%

Rate of Return Taxed at Capital Gains Rates 4.40%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00%

Ordinary and Health Care Tax Rate 44.60%

Mr. and Mrs. Neal Navigator

12

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Annuity

Payments

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

8,702,613

(149,400)

8,553,213

Year 2 8,553,213 51,319 205,277 376,341 8,702,613 (217,313) 17,671,450

Year 3 17,671,450 106,029 424,115 777,544 8,702,613 (272,175) 27,409,575

Schedule 1 - Scenario 2 (assets earn 7.4% annually)

Neal and Nancy Navigator

Technique A: Contributing Assets That Are Not in Entities to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

7.40% Assumptions (continued):

GRAT Annual Annuity

$8,702,613

Rate of Return Taxed at Ordinary Rates 0.60% IRS §7520 Rate 2.20%

Rate of Return Tax Free 2.40% Rate of Return Taxed at Capital Gains Rates 4.40%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00%

Ordinary and Health Care Tax Rate 44.60%

Mr. and Mrs. Neal Navigator

Three Year Grantor Retained Annuity Trust

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1

25,000,000

150,000

600,000

1,100,000

(8,702,613)

-

18,147,388

Year 2 18,147,388 108,884 435,537 798,485 (8,702,613) - 10,787,682

Year 3 10,787,682 64,726 258,904 474,658 (8,702,613) (2,883,358) -

Non-GST Tax Exempt Grantor Trusts Created by Neal Navigator for the Benefit of Nancy Navigator and their Descendants (Remanider of 3-Year GRAT)

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

GRAT Beneficiary

Terminates Distributions

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

-

Year 2 - - - - - - - -

Year 3 - - - - 2,883,358 - - 2,883,358

13

14

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets

Distributions

Holdco

Distributions

Cash

Annuity

Payments

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

7,200

12,308

1,218,492

(149,400)

1,088,600

Year 2 1,088,600 6,532 26,126 47,898 7,445 319,107 935,928 (217,313) 2,214,324

Year 3 2,214,324 13,286 53,144 97,430 7,698 654,913 625,181 (272,175) 3,393,801

Ownership

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT &

Neal Grantor

Navigator Trust #1

25.43% 74.57%

51.16% 48.84%

78.31% 21.69%

In-Kind

Annuity

Payments

with Holdco

Units

Holdco

%

4,635,306

4,988,511

5,376,944

24.43%

25.74%

27.15%

Schedule 1 - Scenario 2 (assets earn 7.4% annually)

Neal and Nancy Navigator

Technique B: Contribution of Non-Leveraged Entities to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 7.40% Financial Assets, LP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 4.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates 4.40% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $4,926,737

Long-Term Capital Gain Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary Tax Rate 44.60%

Mr. and Mrs. Neal Navigator

Financial Assets, LP

Beginning

of Year Tax

Financial & Free

Other Assets Income Income Growth Distributions

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

18,000,000 108,000 432,000 792,000 (720,000)

18,612,000 111,672 446,688 818,928 (744,480)

19,244,808 115,469 461,875 846,772 (769,792)

18,612,000

19,244,808

19,899,131

Holdco, FLLC

Beginning

of Year Tax Financial

Financial & Free Assets, LP

Other Assets Income Income Growth Distributions Distributions

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

7,000,000 42,000 168,000 308,000 712,800 (1,230,800)

7,000,000 42,000 168,000 308,000 737,035 (1,255,035)

7,000,000 42,000 168,000 308,000 762,094 (1,280,094)

7,000,000

7,000,000

7,000,000

Three Year Grantor Retained Annuity Trust

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco, FLLC

Distributions

Cash

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 1,218,492 (1,218,492) - -

Year 2 - - - - 935,928 (935,928) - -

Year 3 - - - - 625,181 (625,181) - -

15

Schedule 1 - Scenario 2 (assets earn 7.4% annually)

Neal and Nancy Navigator

Technique B: Contribution of Non-Leveraged Entities to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 7.40% Financial Assets, LP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 4.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates 4.40% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $4,926,737

Long-Term Capital Gain Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary Tax Rate 44.60%

New Non-GST Grantor Trusts #1 Created by Neal Navigator for the Benefit of Nancy Navigator and their Children (Remanider of 3-Year GRAT)

Beginning

of Year Tax

Financial & Free Holdco, FLLC Beneficiary Income

Other Assets Income Income Growth Distributions Distributions Taxes

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

- - - - - - -

- - - - - - -

- - - - - - -

-

-

-

16

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets

Distributions

Holdco

Distributions

Annuity

Payments

Note

Payments

Income

Taxe

s

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

8,000

5,175

512,331

53,519

(149,400)

429,625

Year 2 429,625 2,578 10,311 18,904 8,000 5,175 512,331 53,519 (217,313) 823,130

Year 3 823,130 4,939 19,755 36,218 3,821 5,175 512,331 53,519 (272,175) 1,186,712

Ownership

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT &

Neal Grantor

Navigator Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Schedule 1 - Scenario 2 (assets earn 7.4% annually)

Neal and Nancy Navigator

Technique C: Leveraged FLLC Asset Contributed to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 7.40% Financial Assets, FLP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 2.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates 4.40% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $512,331

Long-Term Capital Gain and Health Care Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary and Health Care Tax Rate 44.60% Intra-Family Interest Rate (short-term) 0.32%

Mr. and Mrs. Neal Navigator

Financial Assets, LP

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Distributions

End of Year

Financial

& Other

Assets

Year 1 18,000,000 108,000 432,000 792,000 (800,000) 18,532,000

Year 2 18,532,000 111,192 444,768 815,408 (800,000) 19,103,368

Year 3 19,103,368 114,620 458,481 840,548 (382,067) 20,134,950

Holdco, FLLC

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets, LP

Distributions

Note

Payments

Distributions

End of Year

Financial

& Other

Assets

Year 1 7,000,000 42,000 168,000 308,000 792,000 (53,519) (517,506) 7,738,975

Year 2 7,738,975 46,434 185,735 340,515 792,000 (53,519) (517,506) 8,532,634

Year 3 8,532,634 51,196 204,783 375,436 378,247 (53,519) (517,506) 8,971,270

Three Year Grantor Retained Annuity Trust

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco, FLLC

Distributions

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 512,331 (512,331) - -

Year 2 - - - - 512,331 (512,331) - -

Year 3 - - - - 512,331 (512,331) - -

17

Schedule 1 - Scenario 2 (assets earn 7.4% annually)

Neal and Nancy Navigator

Technique C: Leveraged FLLC Asset Contributed to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 7.40% Financial Assets, FLP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 2.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates 4.40% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $512,331

Long-Term Capital Gain and Health Care Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary and Health Care Tax Rate 44.60% Intra-Family Interest Rate (short-term) 0.32%

New Non-GST Tax Exempt Grantor Trusts Created by Neal Navigator for the Benefit of Nancy Navigator and their Children (Remanider of 3-Year GRAT)

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco, FLLC

Distributions

Beneficiary

Distributions

Income

Taxe

s

End of Year

Financial

& Other

Assets

Year 1 - - - - - - - -

Year 2 - - - - - - - -

Year 3 - - - - - - - -

Note #1 Between Neal Navigator and Holdco, FLLC

for the Purchase of Non-Managing Member Interests

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 16,724,700 53,519 (53,519) 16,724,700

Year 2 16,724,700 53,519 (53,519) 16,724,700

Year 3 16,724,700 53,519 (53,519) 16,724,700

18

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets LP

Distributions

Holdco

FLLC

Distributions

Preferred

Holdco

Distributions

Growth

Holdco

Distributions

GRAT

#1 & #2

Annuity

Payments

Notes

#1 & #2

Payments

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1 - - - - 3,600 - 4,062 808 482,170 50,368 (149,400) 391,609

Year 2 391,609 2,350 9,399 17,231 3,794 - 4,062 808 482,170 50,368 (217,313) 744,478

Year 3 744,478 4,467 17,867 32,757 3,999 - 4,062 808 482,170 50,368 (272,175) 1,068,803

Ownership

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Growth Ownership

Growth

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT #1

Neal & Grantor

Navigator Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Schedule 1 - Scenario 2 (assets earn 7.4% annually)

Neal and Nancy Navigator

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

7.40%

Assumptions (continued):

Financial Assets, FLP Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Holdco, FLLC Preferred Interest $14,586,400

Rate of Return Tax Free 2.40% Holdco, FLLC Preferred Coupon 7.00%

Rate of Return Taxed at Capital Gains Rates 4.40% Holdco, FLLC Valuation Discount 30.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Preferred Holdco, FLLC Valuation Discount 20.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00% Growth Holdco, FLLC Valuation Discount 20.00%

Ordinary and Health Care Tax Rate 44.60% GRAT #1 Annual Annuity $402,145

GRAT #2 Annual Annuity $80,025

IRS §7520 Rate 2.20%

Intra-Family Interest Rate (short-term) 0.32%

Mr. and Mrs. Neal Navigator

Financial Assets, LP

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Growth

Distributions

End of Year

Financial

& Other

Assets

Year 1 18,000,000 108,000 432,000 792,000 (360,000) 18,972,000

Year 2 18,972,000 113,832 455,328 834,768 (379,440) 19,996,488

Year 3 19,996,488 119,979 479,916 879,845 (399,930) 21,076,298

Holdco, FLLC

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets, LP

Distributions

Preferred

Distributions

Growth

Distributions

End of Year

Financial

& Other

Assets

Year 1 6,650,000 39,900 159,600 292,600 356,400 (1,021,048) - 6,477,452

Year 2 6,477,452 38,865 155,459 285,008 375,646 (1,021,048) - 6,311,381

Year 3 6,311,381 37,868 151,473 277,701 395,930 (1,021,048) - 6,153,306

Preferred Holdco, FLLC

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco

Preferred

Distributions

Note #1

Payments

Distributions

End of Year

Financial

& Other

Assets

Year 1 - - - - 1,021,048 (42,009) (406,207) 572,832

Year 2 572,832 3,437 13,748 25,205 1,021,048 (42,009) (406,207) 1,188,053

Year 3 1,188,053 7,128 28,513 52,274 1,021,048 (42,009) (406,207) 1,848,801

19

Ownership

GRAT #2

Neal & Grantor

Navigator Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco

Growth

Distributions

Note #2

Payments

Distributions

End of Year

Financial

& Other

Assets

Year 1 350,000 2,100 8,400 15,400 - (8,360) (80,833) 286,707

Year 2 286,707 1,720 6,881 12,615 - (8,360) (80,833) 218,731

Year 3 218,731 1,312 5,250 9,624 - (8,360) (80,833) 145,724

Schedule 1 - Scenario 2 (assets earn 7.4% annually)

Neal and Nancy Navigator

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

7.40%

Assumptions (continued):

Financial Assets, FLP Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Holdco, FLLC Preferred Interest $14,586,400

Rate of Return Tax Free 2.40% Holdco, FLLC Preferred Coupon 7.00%

Rate of Return Taxed at Capital Gains Rates 4.40% Holdco, FLLC Valuation Discount 30.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Preferred Holdco, FLLC Valuation Discount 20.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00% Growth Holdco, FLLC Valuation Discount 20.00%

Ordinary and Health Care Tax Rate 44.60% GRAT #1 Annual Annuity $402,145

GRAT #2 Annual Annuity $80,025

IRS §7520 Rate 2.20%

Intra-Family Interest Rate (short-term) 0.32%

Growth Holdco, FLLC

Three Year Grantor Retained Annuity Trust #1

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Preferred

Holdco, FLLC

Distributions

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 402,145 (402,145) - -

Year 2 - - - - 402,145 (402,145) - -

Year 3 - - - - 402,145 (402,145) - -

Three Year Grantor Retained Annuity Trust #2

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Growth

Holdco, FLLC

Distributions

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 80,025 (80,025) - -

Year 2 - - - - 80,025 (80,025) - -

Year 3 - - - - 80,025 (80,025) - -

20

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 2,612,358 8,360 (8,360) 2,612,358

Year 2 2,612,358 8,360 (8,360) 2,612,358

Year 3 2,612,358 8,360 (8,360) 2,612,358

Schedule 1 - Scenario 2 (assets earn 7.4% annually)

Neal and Nancy Navigator

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

7.40%

Assumptions (continued):

Financial Assets, FLP Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Holdco, FLLC Preferred Interest $14,586,400

Rate of Return Tax Free 2.40% Holdco, FLLC Preferred Coupon 7.00%

Rate of Return Taxed at Capital Gains Rates 4.40% Holdco, FLLC Valuation Discount 30.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Preferred Holdco, FLLC Valuation Discount 20.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00% Growth Holdco, FLLC Valuation Discount 20.00%

Ordinary and Health Care Tax Rate 44.60% GRAT #1 Annual Annuity $402,145

GRAT #2 Annual Annuity $80,025

IRS §7520 Rate 2.20%

Intra-Family Interest Rate (short-term) 0.32%

New Non-GST Tax Exempt Grantor Trusts Created by Neal Navigator for the Benefit of Nancy Navigator and their Children (Remanider of 3-Year GRATs)

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Preferred

Holdco, FLLC

Distributions

Growth

Holdco, FLLC

Distributions

Beneficiary

Distributions

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1 - - - - - - - - -

Year 2 - - - - - - - - -

Year 3 - - - - - - - - -

Note #1 Between Neal Navigator and Preferred Holdco, FLLC Note #2 Between Neal Navigator and Growth Holdco, FLLC

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 13,127,760 42,009 (42,009) 13,127,760

Year 2 13,127,760 42,009 (42,009) 13,127,760

Year 3 13,127,760 42,009 (42,009) 13,127,760

Three-Year

Future Values

Present Values

(Discounted at 2.5%)

Percentage

of Total

No Further Planning

Mr. Neal Navigator 32,295,905 29,989,958 97.06%

IRS Income Tax - Direct Cost

906,657

841,921

2.72%

IRS Income Tax - Investment Opportunity Cost 72,438 67,266 0.22%

Total $33,275,000 $30,899,145 100.00%

Technique A: Contributing Assets That Are Not in Entities to a GRAT Mr. Neal Navigator 27,826,552 25,839,720 83.63%

Navigator Children 4,469,353 4,150,238 13.43%

IRS Income Tax - Direct Cost 906,657 841,921 2.72%

IRS Income Tax - Investment Opportunity Cost 72,438 67,266 0.22%

Total $33,275,000 $30,899,145 100.00%

Technique B: Contribution of Non-Leveraged Entities to a GRAT Mr. Neal Navigator 24,569,260 22,815,000 73.84%

Navigator Children 7,726,645 7,174,958 23.22%

IRS Income Tax - Direct Cost 906,657 841,921 2.72%

IRS Income Tax - Investment Opportunity Cost 72,438 67,266 0.22%

Total $33,275,000 $30,899,145 100.00%

Technique C: Leveraged FLLC Asset Contributed to a GRAT Mr. Neal Navigator 18,186,732 16,888,188 54.66%

Navigator Children 14,109,173 13,101,770 42.40%

IRS Income Tax - Direct Cost 906,657 841,921 2.72%

IRS Income Tax - Investment Opportunity Cost 72,438 67,266 0.22%

Total $33,275,000 $30,899,145 100.00%

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs Mr. Neal Navigator 16,784,233 15,585,829 50.44%

Navigator Children 15,511,672 14,404,129 46.62%

IRS Income Tax - Direct Cost 906,657 841,921 2.72%

IRS Income Tax - Investment Opportunity Cost 72,438 67,266 0.22%

Total $33,275,000 $30,899,145 100.00%

Schedule 1 - Scenario 3 (assets earn 10.0% annually)

Neal and Nancy Navigator Hypothetical Integrated Income and Estate Tax Plan Comparisons (Three-Year Future Values)

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative

purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Navigator Children - - 0.00%

21

Beginning

of Year Tax

Financial & Free Income

Other Assets Income Income Growth Taxes

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

25,000,000 150,000 600,000 1,750,000 (198,150)

27,301,850 163,811 655,244 1,911,130 (308,269)

29,723,766 178,343 713,370 2,080,664 (400,237)

27,301,850

29,723,766

32,295,905

Schedule 1 - Scenario 3 (assets earn 10.0% annually)

Neal and Nancy Navigator

No Further Planning This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative

purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Total Estimated Rate of Return 10.00%

Rate of Return Taxed at Ordinary Rates 0.60%

Rate of Return Tax Free 2.40%

Rate of Return Taxed at Capital Gains Rates 7.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00%

Ordinary and Health Care Tax Rate 44.60%

Mr. Neal Navigator

22

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Annuity

Payments

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

8,702,613

(198,150)

8,504,463

Year 2 8,504,463 51,027 204,107 595,312 8,702,613 (308,269) 17,749,252

Year 3 17,749,252 106,496 425,982 1,242,448 8,702,613 (400,237) 27,826,552

Schedule 1 - Scenario 3 (assets earn 10.0% annually)

Neal and Nancy Navigator

Technique A: Contributing Assets That Are Not in Entities to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

10.00% Assumptions (continued):

GRAT Annual Annuity

$8,702,613

Rate of Return Taxed at Ordinary Rates 0.60% IRS §7520 Rate 2.20%

Rate of Return Tax Free 2.40% Rate of Return Taxed at Capital Gains Rates 7.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00%

Ordinary and Health Care Tax Rate 44.60%

Mr. Neal Navigator

Three Year Grantor Retained Annuity Trust

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1

25,000,000

150,000

600,000

1,750,000

(8,702,613)

-

18,797,388

Year 2 18,797,388 112,784 451,137 1,315,817 (8,702,613) - 11,974,514

Year 3 11,974,514 71,847 287,388 838,216 (8,702,613) (4,469,353) -

Non-GST Tax Exempt Grantor Trusts Created by Neal Navigator for the Benefit of Nancy Navigator and their Descendants (Remanider of 3-Year GRAT)

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

GRAT Beneficiary

Terminates Distributions

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

-

Year 2 - - - - - - - -

Year 3 - - - - 4,469,353 - - 4,469,353

23

24

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets

Distributions

Holdco

Distributions

Cash

Annuity

Payments

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

7,200

14,128

1,398,672

(198,150)

1,221,850

Year 2 1,221,850 7,331 29,324 85,530 7,632 347,535 1,108,033 (308,269) 2,498,966

Year 3 2,498,966 14,994 59,975 174,928 8,090 716,316 784,586 (400,237) 3,857,617

Ownership

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT &

Neal Grantor

Navigator Trust #1

23.88% 76.12%

47.73% 52.27%

72.62% 27.38%

In-Kind

Annuity

Payments

with Holdco

Units

Holdco

%

4,410,081

4,773,380

5,177,688

22.88%

23.85%

24.90%

Schedule 1 - Scenario 3 (assets earn 10.0% annually)

Neal and Nancy Navigator

Technique B: Contribution of Non-Leveraged Entities to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 10.00% Financial Assets, LP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 4.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates 7.00% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $4,926,737

Long-Term Capital Gain Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary Tax Rate 44.60%

Mr. Neal Navigator

Financial Assets, LP

Beginning

of Year Tax

Financial & Free

Other Assets Income Income Growth Distributions

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

18,000,000 108,000 432,000 1,260,000 (720,000)

19,080,000 114,480 457,920 1,335,600 (763,200)

20,224,800 121,349 485,395 1,415,736 (808,992)

19,080,000

20,224,800

21,438,288

Holdco, FLLC

Beginning

of Year Tax Financial

Financial & Free Assets, LP

Other Assets Income Income Growth Distributions Distributions

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

7,000,000 42,000 168,000 490,000 712,800 (1,412,800)

7,000,000 42,000 168,000 490,000 755,568 (1,455,568)

7,000,000 42,000 168,000 490,000 800,902 (1,500,902)

7,000,000

7,000,000

7,000,000

Three Year Grantor Retained Annuity Trust

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco, FLLC

Distributions

Cash

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 1,398,672 (1,398,672) - -

Year 2 - - - - 1,108,033 (1,108,033) - -

Year 3 - - - - 784,586 (784,586) - -

25

Schedule 1 - Scenario 3 (assets earn 10.0% annually)

Neal and Nancy Navigator

Technique B: Contribution of Non-Leveraged Entities to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 10.00% Financial Assets, LP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 4.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates 7.00% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $4,926,737

Long-Term Capital Gain Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary Tax Rate 44.60%

New Non-GST Grantor Trusts #1 Created by Neal Navigator for the Benefit of Nancy Navigator and their Children (Remanider of 3-Year GRAT)

Beginning

of Year Tax

Financial & Free Holdco, FLLC Beneficiary Income

Other Assets Income Income Growth Distributions Distributions Taxes

End of Year

Financial

& Other

Assets

Year 1

Year 2

Year 3

- - - - - - -

- - - - - - -

- - - - - - -

-

-

-

26

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets

Distributions

Holdco

Distributions

Annuity

Payments

Note

Payments

Income

Taxe

s

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

8,000

5,175

512,331

53,519

(198,150)

380,875

Year 2 380,875 2,285 9,141 26,661 8,000 5,175 512,331 53,519 (308,269) 689,719

Year 3 689,719 4,138 16,553 48,280 4,020 5,175 512,331 53,519 (400,237) 933,498

Ownership

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT &

Neal Grantor

Navigator Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Schedule 1 - Scenario 3 (assets earn 10.0% annually)

Neal and Nancy Navigator

Technique C: Leveraged FLLC Asset Contributed to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 10.00% Financial Assets, FLP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 2.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates 7.00% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $512,331

Long-Term Capital Gain and Health Care Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary and Health Care Tax Rate 44.60% Intra-Family Interest Rate (short-term) 0.32%

Mr. Neal Navigator

Financial Assets, LP

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Distributions

End of Year

Financial

& Other

Assets

Year 1 18,000,000 108,000 432,000 1,260,000 (800,000) 19,000,000

Year 2 19,000,000 114,000 456,000 1,330,000 (800,000) 20,100,000

Year 3 20,100,000 120,600 482,400 1,407,000 (402,000) 21,708,000

Holdco, FLLC

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets, LP

Distributions

Note

Payments

Distributions

End of Year

Financial

& Other

Assets

Year 1 7,000,000 42,000 168,000 490,000 792,000 (53,519) (517,506) 7,920,975

Year 2 7,920,975 47,526 190,103 554,468 792,000 (53,519) (517,506) 8,934,047

Year 3 8,934,047 53,604 214,417 625,383 397,980 (53,519) (517,506) 9,654,406

Three Year Grantor Retained Annuity Trust

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco, FLLC

Distributions

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 512,331 (512,331) - -

Year 2 - - - - 512,331 (512,331) - -

Year 3 - - - - 512,331 (512,331) - -

27

Schedule 1 - Scenario 3 (assets earn 10.0% annually)

Neal and Nancy Navigator

Technique C: Leveraged FLLC Asset Contributed to a GRAT This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions (continued): Total Estimated Rate of Return 10.00% Financial Assets, FLP Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Financial Assets, LP Distributions 2.00%

Rate of Return Tax Free 2.40% Holdco, FLLC Valuation Discount 20.00%

Rate of Return Taxed at Capital Gains Rates 7.00% Holdco, FLLC Distributions 2.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annual Annuity $512,331

Long-Term Capital Gain and Health Care Tax Rate 25.00% IRS §7520 Rate 2.20%

Ordinary and Health Care Tax Rate 44.60% Intra-Family Interest Rate (short-term) 0.32%

New Non-GST Tax Exempt Grantor Trusts Created by Neal Navigator for the Benefit of Nancy Navigator and their Children (Remanider of 3-Year GRAT)

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco, FLLC

Distributions

Beneficiary

Distributions

Income

Taxe

s

End of Year

Financial

& Other

Assets

Year 1 - - - - - - - -

Year 2 - - - - - - - -

Year 3 - - - - - - - -

Note #1 Between Neal Navigator and Holdco, FLLC

for the Purchase of Non-Managing Member Interests

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 16,724,700 53,519 (53,519) 16,724,700

Year 2 16,724,700 53,519 (53,519) 16,724,700

Year 3 16,724,700 53,519 (53,519) 16,724,700

28

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets LP

Distributions

Holdco

FLLC

Distributions

Preferred

Holdco

Distributions

Growth

Holdco

Distributions

GRAT

#1 & #2

Annuity

Payments

Notes

#1 & #2

Payments

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1 - - - - 3,600 - 4,062 808 482,170 (292,491) (198,150) -

Year 2 - - - - 3,888 - 4,062 808 482,170 (182,659) (308,269) -

Year 3 - - - - 4,199 - 4,062 808 482,170 (91,002) (400,237) -

Ownership

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Growth Ownership

Growth

Neal Holdco,

Navigator FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT #1

Neal & Grantor

Navigator Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Schedule 1 - Scenario 3 (assets earn 10.0% annually)

Neal and Nancy Navigator

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

10.00%

Assumptions (continued):

Financial Assets, FLP Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Holdco, FLLC Preferred Interest $14,586,400

Rate of Return Tax Free 2.40% Holdco, FLLC Preferred Coupon 7.00%

Rate of Return Taxed at Capital Gains Rates 7.00% Holdco, FLLC Valuation Discount 30.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Preferred Holdco, FLLC Valuation Discount 20.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00% Growth Holdco, FLLC Valuation Discount 20.00%

Ordinary and Health Care Tax Rate 44.60% GRAT #1 Annual Annuity $402,145

GRAT #2 Annual Annuity $80,025

IRS §7520 Rate 2.20%

Intra-Family Interest Rate (short-term) 0.32%

Mr. and Mrs. Neal Navigator

Financial Assets, LP

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Growth

Distributions

End of Year

Financial

& Other

Assets

Year 1 18,000,000 108,000 432,000 1,260,000 (360,000) 19,440,000

Year 2 19,440,000 116,640 466,560 1,360,800 (388,800) 20,995,200

Year 3 20,995,200 125,971 503,885 1,469,664 (419,904) 22,674,816

Holdco, FLLC

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Financial

Assets, LP

Distributions

Preferred

Distributions

Growth

Distributions

End of Year

Financial

& Other

Assets

Year 1 6,650,000 39,900 159,600 465,500 356,400 (1,021,048) - 6,650,352

Year 2 6,650,352 39,902 159,608 465,525 384,912 (1,021,048) - 6,679,251

Year 3 6,679,251 40,076 160,302 467,548 415,705 (1,021,048) - 6,741,833

Preferred Holdco, FLLC

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco

Preferred

Distributions

Note #1

Payments

Distributions

End of Year

Financial

& Other

Assets

Year 1 - - - - 1,021,048 300,850 (406,207) 915,691

Year 2 915,691 5,494 21,977 64,098 1,021,048 191,019 (406,207) 1,813,119

Year 3 1,813,119 10,879 43,515 126,918 1,021,048 99,362 (406,207) 2,708,633

29

Ownership

GRAT #2

Neal & Grantor

Navigator Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Holdco

Growth

Distributions

Note #2

Payments

Distributions

End of Year

Financial

& Other

Assets

Year 1 350,000 2,100 8,400 24,500 - (8,360) (80,833) 295,807

Year 2 295,807 1,775 7,099 20,707 - (8,360) (80,833) 236,195

Year 3 236,195 1,417 5,669 16,534 - (8,360) (80,833) 170,622

Schedule 1 - Scenario 3 (assets earn 10.0% annually)

Neal and Nancy Navigator

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

10.00%

Assumptions (continued):

Financial Assets, FLP Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Holdco, FLLC Preferred Interest $14,586,400

Rate of Return Tax Free 2.40% Holdco, FLLC Preferred Coupon 7.00%

Rate of Return Taxed at Capital Gains Rates 7.00% Holdco, FLLC Valuation Discount 30.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Preferred Holdco, FLLC Valuation Discount 20.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00% Growth Holdco, FLLC Valuation Discount 20.00%

Ordinary and Health Care Tax Rate 44.60% GRAT #1 Annual Annuity $402,145

GRAT #2 Annual Annuity $80,025

IRS §7520 Rate 2.20%

Intra-Family Interest Rate (short-term) 0.32%

Growth Holdco, FLLC

Three Year Grantor Retained Annuity Trust #1

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Preferred

Holdco, FLLC

Distributions

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 402,145 (402,145) - -

Year 2 - - - - 402,145 (402,145) - -

Year 3 - - - - 402,145 (402,145) - -

Three Year Grantor Retained Annuity Trust #2

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Growth

Holdco, FLLC

Distributions

Annuity

Payments

GRAT

Terminates

End of Year

Financial

& Other

Assets

Year 1 - - - - 80,025 (80,025) - -

Year 2 - - - - 80,025 (80,025) - -

Year 3 - - - - 80,025 (80,025) - -

30

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 2,612,358 8,360 (8,360) 2,612,358

Year 2 2,612,358 8,360 (8,360) 2,612,358

Year 3 2,612,358 8,360 (8,360) 2,612,358

Schedule 1 - Scenario 3 (assets earn 10.0% annually)

Neal and Nancy Navigator

Technique D: Two Leveraged FLLCs (Preferred and Growth) Assets Contributed to Two Different GRATs This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

10.00%

Assumptions (continued):

Financial Assets, FLP Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates 0.60% Holdco, FLLC Preferred Interest $14,586,400

Rate of Return Tax Free 2.40% Holdco, FLLC Preferred Coupon 7.00%

Rate of Return Taxed at Capital Gains Rates 7.00% Holdco, FLLC Valuation Discount 30.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Preferred Holdco, FLLC Valuation Discount 20.00%

Long-Term Capital Gain and Health Care Tax Rate 25.00% Growth Holdco, FLLC Valuation Discount 20.00%

Ordinary and Health Care Tax Rate 44.60% GRAT #1 Annual Annuity $402,145

GRAT #2 Annual Annuity $80,025

IRS §7520 Rate 2.20%

Intra-Family Interest Rate (short-term) 0.32%

New Non-GST Tax Exempt Grantor Trusts Created by Neal Navigator for the Benefit of Nancy Navigator and their Children (Remanider of 3-Year GRATs)

Beginning

of Year

Financial &

Other Assets

Income

Tax

Free

Income

Growth

Preferred

Holdco, FLLC

Distributions

Growth

Holdco, FLLC

Distributions

Beneficiary

Distributions

Income

Taxes

End of Year

Financial

& Other

Assets

Year 1 - - - - - - - - -

Year 2 - - - - - - - - -

Year 3 - - - - - - - - -

Note #1 Between Neal Navigator and Preferred Holdco, FLLC Note #2 Between Neal Navigator and Growth Holdco, FLLC

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 13,127,760 42,009 300,850 13,470,619

Year 2 13,470,619 43,106 191,019 13,704,743

Year 3 13,704,743 43,855 99,362 13,847,960

Hypothetical Technique #1:

73,164,965 - - 0.00%

273,663,944 305,826,923 164,960,164 46.04%

- 19,560,000 10,550,480 2.94%

72,918,529 72,918,529 39,331,568 10.98%

102,732,004 102,732,004 55,412,676 15.46%

68,221,681 68,221,681 36,798,133 10.27%

73,592,594 73,592,594 39,695,153 11.08%

21,441,986 11,565,605 3.23%

$664,293,718 $664,293,718 $358,313,780 100.00%

Hypothetical Technique #2:

5,672,187 - - 0.00%

341,160,771 341,160,771 184,018,909 51.36%

- 5,672,187 3,059,525 0.85%

72,918,529 72,918,529 39,331,568 10.98%

102,732,004 102,732,004 55,412,676 15.46%

68,217,632 68,217,632 36,795,949 10.27%

73,592,594 73,592,594 39,695,153 11.08%

- - - 0.00%

$664,293,718 $664,293,718 $358,313,780 100.00%

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Integrated Income and Estate Tax Plan Comparisons (assuming Mr. and Mrs. Art have a joint life expectancy of 25 years)

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative

purposes only and no representation is being made that any client will or is likely to achieve the results shown.

25-Year Future Values Present Values

(Discounted Percentage Pre-Death Post Death at 2.5%) of Total

No Further Planning Schedule 2 348,104,658 - - 0.00%

Art Children - 197,066,795 106,295,975 29.67%

Art Children and Grandchildren - 19,660,000 10,604,419 2.96%

Consumption - Direct Cost 72,918,529 72,918,529 39,331,568 10.98%

Consumption - Investment Opportunity Cost 102,732,004 102,732,004 55,412,676 15.46%

IRS Income Tax - Direct Cost 66,945,932 66,945,932 36,110,006 10.08%

IRS Income Tax - Investment Opportunity Costs 73,592,594 73,592,594 39,695,153 11.08%

IRS - Estate Tax (at 40.0%)

Total

- 131,377,863 70,863,983 19.78%

$664,293,718 $664,293,718 $358,313,780 100.00%

Schedule 2

Art Children

Art Children and Grandchildren

Consumption - Direct Cost

Consumption - Investment Opportunity Cost

IRS Income Tax - Direct Cost

IRS Income Tax - Investment Opportunity Costs

IRS - Estate Tax (at 40.0%)

Total

Schedule 2

Art Children

Art Children and Grandchildren

Consumption - Direct Cost

Consumption - Investment Opportunity Cost

IRS Income Tax - Direct Cost

IRS Income Tax - Investment Opportunity Costs

IRS - Estate Tax (at 40.0%)

Total

Calculations of Remaining Estate Tax Exemption

No Further

Planning

Hypothetical

Techniques

Current Gift and Estate Exemption 10,860,000 10,860,000

Gifts Made - (100,000)

Future Estate Tax Exemption Available in 25 years (assumes 3% inflation) 19,660,000 19,560,000 1

Schedule 2

Mr. and Mrs. Al Art

Asset Page This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples

shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Al Art

Assets and Assumed Basis*

FMV: Financial & Other Assets

$5,000,000

Basis: Financial & Other Assets $5,000,000

FMV: Private Equity $25,000,000

Basis: Private Equity $25,000,000

FMV: Various Financial LLC Interests $70,000,000

Basis: Various Financial LLC Interests $70,000,000

FMV: Artwork $10,000,000

Basis: Artwork $10,000,000

Total Assets:

$110,000,000

Total Basis: $110,000,000

* Information provided by client. There is no proposed planning for Mr. Art's other assets.

2

3

Schedule 2

Mr. and Mrs. Al Art

No Further Planning This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year) Long-

Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Schedule 2

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Various

LLC

Distributions

Private

Equit

y

LLC

Distributions

Consumption

from these

Sources

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Artwork

Growth

End of Year

Artwork

End of Year

Financial

& Other

Assets

Year 1

5,000,000

30,000

120,000

220,000

2,100,000

950,000

(2,000,000)

(852,300)

5,567,700

10,000,000

800,000

10,800,000

16,367,700

Year 2 5,567,700 33,406 133,625 244,979 2,192,400 1,074,200 (2,060,000) (1,084,396) 6,101,914 10,800,000 864,000 11,664,000 17,765,914

Year 3 6,101,914 36,611 146,446 268,484 2,288,866 1,190,451 (2,121,800) (1,271,182) 6,639,790 11,664,000 933,120 12,597,120 19,236,910

Year 4 6,639,790 39,839 159,355 292,151 2,389,576 1,299,262 (2,185,454) (1,426,368) 7,208,150 12,597,120 1,007,770 13,604,890 20,813,039

Year 5 7,208,150 43,249 172,996 317,159 2,494,717 1,401,110 (2,251,018) (1,559,703) 7,826,659 13,604,890 1,088,391 14,693,281 22,519,940

Year 6 7,826,659 46,960 187,840 344,373 2,604,485 1,496,439 (2,318,548) (1,678,139) 8,510,067 14,693,281 1,175,462 15,868,743 24,378,811

Year 7 8,510,067 51,060 204,242 374,443 2,719,082 1,585,666 (2,388,105) (1,786,655) 9,269,802 15,868,743 1,269,499 17,138,243 26,408,044

Year 8 9,269,802 55,619 222,475 407,871 2,838,721 1,669,184 (2,459,748) (1,888,834) 10,115,091 17,138,243 1,371,059 18,509,302 28,624,393

Year 9 10,115,091 60,691 242,762 445,064 2,963,625 1,747,356 (2,533,540) (1,987,277) 11,053,772 18,509,302 1,480,744 19,990,046 31,043,818

Year 10 11,053,772 66,323 265,291 486,366 3,094,025 1,820,525 (2,609,546) (2,083,893) 12,092,861 19,990,046 1,599,204 21,589,250 33,682,111

Year 11 12,092,861 72,557 290,229 532,086 3,230,162 1,889,012 (2,687,833) (2,180,103) 13,238,970 21,589,250 1,727,140 23,316,390 36,555,360

Year 12 13,238,970 79,434 317,735 582,515 3,372,289 1,953,115 (2,768,468) (2,276,985) 14,498,605 23,316,390 1,865,311 25,181,701 39,680,306

Year 13 14,498,605 86,992 347,967 637,939 3,520,670 2,013,116 (2,851,522) (2,375,379) 15,878,386 25,181,701 2,014,536 27,196,237 43,074,624

Year 14 15,878,386 95,270 381,081 698,649 3,675,579 2,069,276 (2,937,067) (2,475,958) 17,385,217 27,196,237 2,175,699 29,371,936 46,757,153

Year 15 17,385,217 104,311 417,245 764,950 3,837,305 2,121,842 (3,025,179) (2,579,280) 19,026,411 29,371,936 2,349,755 31,721,691 50,748,103

Year 16 19,026,411 114,158 456,634 837,162 4,006,146 2,171,045 (3,115,935) (2,685,826) 20,809,796 31,721,691 2,537,735 34,259,426 55,069,222

Year 17 20,809,796 124,859 499,435 915,631 4,182,416 2,217,098 (3,209,413) (2,796,025) 22,743,797 34,259,426 2,740,754 37,000,181 59,743,977

Year 18 22,743,797 136,463 545,851 1,000,727 4,366,443 2,260,203 (3,305,695) (2,910,276) 24,837,513 37,000,181 2,960,014 39,960,195 64,797,708

Year 19 24,837,513 149,025 596,100 1,092,851 4,558,566 2,300,550 (3,404,866) (3,028,955) 27,100,784 39,960,195 3,196,816 43,157,011 70,257,795

Year 20 27,100,784 162,605 650,419 1,192,435 4,759,143 2,338,315 (3,507,012) (3,152,433) 29,544,255 43,157,011 3,452,561 46,609,571 76,153,827

Year 21 29,544,255 177,266 709,062 1,299,947 4,968,545 2,373,663 (3,612,222) (3,281,078) 32,179,438 46,609,571 3,728,766 50,338,337 82,517,775

Year 22 32,179,438 193,077 772,307 1,415,895 5,187,161 2,406,749 (3,720,589) (3,415,262) 35,018,776 50,338,337 4,027,067 54,365,404 89,384,180

Year 23 35,018,776 210,113 840,451 1,540,826 5,415,397 2,437,717 (3,832,207) (3,555,365) 38,075,707 54,365,404 4,349,232 58,714,636 96,790,343

Year 24 38,075,707 228,454 913,817 1,675,331 5,653,674 2,466,703 (3,947,173) (3,701,781) 41,364,732 58,714,636 4,697,171 63,411,807 104,776,540

Year 25 41,364,732 248,188 992,754 1,820,048 5,902,436 13,865,055 (4,065,588) (10,912,480) 49,215,145 63,411,807 5,072,945 68,484,752 117,699,897

4

Schedule 2

Mr. and Mrs. Al Art

No Further Planning This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year) Long-

Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Private Equity

Beginning

of Year

Private

Equity

Income

Tax

Free

Income

Growth

Distributions

End of Year

Private

Equity

Year 1

25,000,000

850,000

-

1,000,000

(950,000)

25,900,000

Year 2 25,900,000 880,600 - 1,036,000 (1,074,200) 26,742,400

Year 3 26,742,400 909,242 - 1,069,696 (1,190,451) 27,530,886

Year 4 27,530,886 936,050 - 1,101,235 (1,299,262) 28,268,910

Year 5 28,268,910 961,143 - 1,130,756 (1,401,110) 28,959,699

Year 6 28,959,699 984,630 - 1,158,388 (1,496,439) 29,606,279

Year 7 29,606,279 1,006,613 - 1,184,251 (1,585,666) 30,211,477

Year 8 30,211,477 1,027,190 - 1,208,459 (1,669,184) 30,777,942

Year 9 30,777,942 1,046,450 - 1,231,118 (1,747,356) 31,308,154

Year 10 31,308,154 1,064,477 - 1,252,326 (1,820,525) 31,804,432

Year 11 31,804,432 1,081,351 - 1,272,177 (1,889,012) 32,268,949

Year 12 32,268,949 1,097,144 - 1,290,758 (1,953,115) 32,703,736

Year 13 32,703,736 1,111,927 - 1,308,149 (2,013,116) 33,110,697

Year 14 33,110,697 1,125,764 - 1,324,428 (2,069,276) 33,491,612

Year 15 33,491,612 1,138,715 - 1,339,664 (2,121,842) 33,848,149

Year 16 33,848,149 1,150,837 - 1,353,926 (2,171,045) 34,181,867

Year 17 34,181,867 1,162,183 - 1,367,275 (2,217,098) 34,494,228

Year 18 34,494,228 1,172,804 - 1,379,769 (2,260,203) 34,786,597

Year 19 34,786,597 1,182,744 - 1,391,464 (2,300,550) 35,060,255

Year 20 35,060,255 1,192,049 - 1,402,410 (2,338,315) 35,316,399

Year 21 35,316,399 1,200,758 - 1,412,656 (2,373,663) 35,556,149

Year 22 35,556,149 1,208,909 - 1,422,246 (2,406,749) 35,780,556

Year 23 35,780,556 1,216,539 - 1,431,222 (2,437,717) 35,990,600

Year 24 35,990,600 1,223,680 - 1,439,624 (2,466,703) 36,187,202

Year 25 36,187,202 1,230,365 - 1,447,488 (13,865,055) 25,000,000

5

Ownership

Al

Art

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Schedule 2

Mr. and Mrs. Al Art

No Further Planning This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year) Long-

Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Various Financials LLCs

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Distributions

End of Year

Financial

Assets

Year 1

70,000,000

420,000

1,680,000

3,080,000

(2,100,000)

73,080,000

Year 2 73,080,000 438,480 1,753,920 3,215,520 (2,192,400) 76,295,520

Year 3 76,295,520 457,773 1,831,092 3,357,003 (2,288,866) 79,652,523

Year 4 79,652,523 477,915 1,911,661 3,504,711 (2,389,576) 83,157,234

Year 5 83,157,234 498,943 1,995,774 3,658,918 (2,494,717) 86,816,152

Year 6 86,816,152 520,897 2,083,588 3,819,911 (2,604,485) 90,636,063

Year 7 90,636,063 543,816 2,175,266 3,987,987 (2,719,082) 94,624,050

Year 8 94,624,050 567,744 2,270,977 4,163,458 (2,838,721) 98,787,508

Year 9 98,787,508 592,725 2,370,900 4,346,650 (2,963,625) 103,134,158

Year 10 103,134,158 618,805 2,475,220 4,537,903 (3,094,025) 107,672,061

Year 11 107,672,061 646,032 2,584,129 4,737,571 (3,230,162) 112,409,632

Year 12 112,409,632 674,458 2,697,831 4,946,024 (3,372,289) 117,355,656

Year 13 117,355,656 704,134 2,816,536 5,163,649 (3,520,670) 122,519,304

Year 14 122,519,304 735,116 2,940,463 5,390,849 (3,675,579) 127,910,154

Year 15 127,910,154 767,461 3,069,844 5,628,047 (3,837,305) 133,538,201

Year 16 133,538,201 801,229 3,204,917 5,875,681 (4,006,146) 139,413,881

Year 17 139,413,881 836,483 3,345,933 6,134,211 (4,182,416) 145,548,092

Year 18 145,548,092 873,289 3,493,154 6,404,116 (4,366,443) 151,952,208

Year 19 151,952,208 911,713 3,646,853 6,685,897 (4,558,566) 158,638,105

Year 20 158,638,105 951,829 3,807,315 6,980,077 (4,759,143) 165,618,182

Year 21 165,618,182 993,709 3,974,836 7,287,200 (4,968,545) 172,905,382

Year 22 172,905,382 1,037,432 4,149,729 7,607,837 (5,187,161) 180,513,219

Year 23 180,513,219 1,083,079 4,332,317 7,942,582 (5,415,397) 188,455,801

Year 24 188,455,801 1,130,735 4,522,939 8,292,055 (5,653,674) 196,747,856

Year 25 196,747,856 1,180,487 4,721,949 8,656,906 (5,902,436) 205,404,761

6

Assumptions (Continued):

Private Equity Valuation Discount 30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #1: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Schedule 2

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Private

Various Equity Holdco

FLLC FLLC FLLC

Growth Distributions Distributions Distributions

GRAT

Annuity

Note Trust

Payments Distributions

Consumption

from these

Sources

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Artwork

Growth

End of Year

Artwork

End of Year

Financial

& Other

Assets

Year 1

5,000,000

30,000

120,000

220,000

21,000

9,500

17,843

1,766,418

870,997

-

(2,000,000)

(852,300)

5,203,458

10,000,000

800,000

10,800,000

16,003,458

Year 2 5,203,458 31,221 124,883 228,952 21,924 10,742 17,843 1,766,418 870,997 - (2,060,000) (1,084,396) 5,132,041 10,800,000 864,000 11,664,000 16,796,041

Year 3 5,132,041 30,792 123,169 225,810 22,889 11,905 17,843 1,766,418 870,997 - (2,121,800) (1,271,182) 4,808,880 11,664,000 933,120 12,597,120 17,406,000

Year 4 4,808,880 28,853 115,413 211,591 23,896 12,993 - - 870,997 - (2,185,454) (1,426,368) 2,460,801 12,597,120 1,007,770 13,604,890 16,065,690

Year 5 2,460,801 14,765 59,059 108,275 24,947 14,011 - - 1,128,862 - (2,251,018) (1,559,703) - 13,604,890 1,088,391 14,693,281 14,693,281

Year 6 - - - - 26,045 14,964 - - 3,955,678 - (2,318,548) (1,678,139) - 14,693,281 1,175,462 15,868,743 15,868,743

Year 7 - - - - 27,191 15,857 - - 4,131,712 - (2,388,105) (1,786,655) - 15,868,743 1,269,499 17,138,243 17,138,243

Year 8 - - - - 28,387 16,692 - - 4,303,502 - (2,459,748) (1,888,834) - 17,138,243 1,371,059 18,509,302 18,509,302

Year 9 - - - - 29,636 17,474 - - 4,473,707 - (2,533,540) (1,987,277) - 18,509,302 1,480,744 19,990,046 19,990,046

Year 10 - - - - 30,940 18,205 - - 4,644,294 - (2,609,546) (2,083,893) - 19,990,046 1,599,204 21,589,250 21,589,250

Year 11 - - - - 32,302 18,890 - - 4,816,744 - (2,687,833) (2,180,103) - 21,589,250 1,727,140 23,316,390 23,316,390

Year 12 - - - - 33,723 19,531 - - 4,992,199 - (2,768,468) (2,276,985) - 23,316,390 1,865,311 25,181,701 25,181,701

Year 13 - - - - 35,207 20,131 - - 5,171,563 - (2,851,522) (2,375,379) - 25,181,701 2,014,536 27,196,237 27,196,237

Year 14 - - - - 36,756 20,693 - - 5,355,576 - (2,937,067) (2,475,958) - 27,196,237 2,175,699 29,371,936 29,371,936

Year 15 - - - - 38,373 21,218 - - 5,544,868 - (3,025,179) (2,579,280) - 29,371,936 2,349,755 31,721,691 31,721,691

Year 16 - - - - 40,061 21,710 - - 5,739,989 - (3,115,935) (2,685,826) - 31,721,691 2,537,735 34,259,426 34,259,426

Year 17 - - - - 41,824 22,171 - - 5,941,443 - (3,209,413) (2,796,025) - 34,259,426 2,740,754 37,000,181 37,000,181

Year 18 - - - - 43,664 22,602 91,846 - 6,057,859 - (3,305,695) (2,910,276) - 37,000,181 2,960,014 39,960,195 39,960,195

Year 19 - - - - 45,586 23,006 91,071 - 648,187 5,625,972 (3,404,866) (3,028,955) - 39,960,195 3,196,816 43,157,011 43,157,011

Year 20 - - - - 47,591 23,383 91,653 - - 6,496,818 (3,507,012) (3,152,433) - 43,157,011 3,452,561 46,609,571 46,609,571

Year 21 - - - - 49,685 23,737 92,537 - - 6,727,341 (3,612,222) (3,281,078) - 46,609,571 3,728,766 50,338,337 50,338,337

Year 22 - - - - 51,872 24,067 93,554 - - 6,966,357 (3,720,589) (3,415,262) - 50,338,337 4,027,067 54,365,404 54,365,404

Year 23 - - - - 54,154 24,377 94,720 - - 7,214,321 (3,832,207) (3,555,365) - 54,365,404 4,349,232 58,714,636 58,714,636

Year 24 - - - - 56,537 24,667 96,043 - - 7,471,707 (3,947,173) (3,701,781) - 58,714,636 4,697,171 63,411,807 63,411,807

Year 25 - - - - 59,024 138,651 198,433 - - 15,857,710 (4,065,588) (12,188,229) - 63,411,807 5,072,945 68,484,752 68,484,752

7

Ownership

Al

Art

GRAT &

Grantor

Trust

1.0%

99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

Assumptions (Continued):

Private Equity Valuation Discount 30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #1: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Holdco FLLC

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Private

Various Equity

FLLC FLLC

Growth Distributions Distributions

Note

Payments Distributions

End of Year

Financial

Assets

Year 1

-

-

-

-

2,079,000

940,500

(870,997)

(1,784,261)

364,242

Year 2 364,242 2,185 8,742 16,027 2,170,476 1,063,458 (870,997) (1,784,261) 969,873

Year 3 969,873 5,819 23,277 42,674 2,265,977 1,178,547 (870,997) (1,784,261) 1,830,909

Year 4 1,830,909 10,985 43,942 80,560 2,365,680 1,286,270 (870,997) - 4,747,349

Year 5 4,747,349 28,484 113,936 208,883 2,469,770 1,387,098 (1,128,862) - 7,826,659

Year 6 7,826,659 46,960 187,840 344,373 2,578,440 1,481,474 (3,955,678) - 8,510,067

Year 7 8,510,067 51,060 204,242 374,443 2,691,891 1,569,810 (4,131,712) - 9,269,802

Year 8 9,269,802 55,619 222,475 407,871 2,810,334 1,652,492 (4,303,502) - 10,115,091

Year 9 10,115,091 60,691 242,762 445,064 2,933,989 1,729,882 (4,473,707) - 11,053,772

Year 10 11,053,772 66,323 265,291 486,366 3,063,084 1,802,320 (4,644,294) - 12,092,861

Year 11 12,092,861 72,557 290,229 532,086 3,197,860 1,870,122 (4,816,744) - 13,238,970

Year 12 13,238,970 79,434 317,735 582,515 3,338,566 1,933,584 (4,992,199) - 14,498,605

Year 13 14,498,605 86,992 347,967 637,939 3,485,463 1,992,984 (5,171,563) - 15,878,386

Year 14 15,878,386 95,270 381,081 698,649 3,638,823 2,048,583 (5,355,576) - 17,385,217

Year 15 17,385,217 104,311 417,245 764,950 3,798,932 2,100,624 (5,544,868) - 19,026,411

Year 16 19,026,411 114,158 456,634 837,162 3,966,085 2,149,334 (5,739,989) - 20,809,796

Year 17 20,809,796 124,859 499,435 915,631 4,140,592 2,194,927 (5,941,443) - 22,743,797

Year 18 22,743,797 136,463 545,851 1,000,727 4,322,778 2,237,601 (6,057,859) (9,184,555) 15,744,803

Year 19 15,744,803 94,469 377,875 692,771 4,512,981 2,277,545 (648,187) (9,107,113) 13,945,145

Year 20 13,945,145 83,671 334,683 613,586 4,711,552 2,314,932 - (9,165,319) 12,838,251

Year 21 12,838,251 77,030 308,118 564,883 4,918,860 2,349,926 - (9,253,688) 11,803,380

Year 22 11,803,380 70,820 283,281 519,349 5,135,290 2,382,681 - (9,355,445) 10,839,356

Year 23 10,839,356 65,036 260,145 476,932 5,361,243 2,413,340 - (9,471,976) 9,944,075

Year 24 9,944,075 59,664 238,658 437,539 5,597,137 2,442,036 - (9,604,322) 9,114,788

Year 25 9,114,788 54,689 218,755 401,051 5,843,411 13,726,404 - (19,843,259) 9,515,839

8

Ownership

Al

Art

Holdco

FLLC

1.0%

99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

Assumptions (Continued):

Private Equity Valuation Discount 30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #1: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Private Equity FLLC

Beginning

of Year

Private

Equity

Income

Tax

Free

Income

Growth Distributions

End of Year

Private

Equity

Year 1

25,000,000

850,000

-

1,000,000

(950,000)

25,900,000

Year 2 25,900,000 880,600 - 1,036,000 (1,074,200) 26,742,400

Year 3 26,742,400 909,242 - 1,069,696 (1,190,451) 27,530,886

Year 4 27,530,886 936,050 - 1,101,235 (1,299,262) 28,268,910

Year 5 28,268,910 961,143 - 1,130,756 (1,401,110) 28,959,699

Year 6 28,959,699 984,630 - 1,158,388 (1,496,439) 29,606,279

Year 7 29,606,279 1,006,613 - 1,184,251 (1,585,666) 30,211,477

Year 8 30,211,477 1,027,190 - 1,208,459 (1,669,184) 30,777,942

Year 9 30,777,942 1,046,450 - 1,231,118 (1,747,356) 31,308,154

Year 10 31,308,154 1,064,477 - 1,252,326 (1,820,525) 31,804,432

Year 11 31,804,432 1,081,351 - 1,272,177 (1,889,012) 32,268,949

Year 12 32,268,949 1,097,144 - 1,290,758 (1,953,115) 32,703,736

Year 13 32,703,736 1,111,927 - 1,308,149 (2,013,116) 33,110,697

Year 14 33,110,697 1,125,764 - 1,324,428 (2,069,276) 33,491,612

Year 15 33,491,612 1,138,715 - 1,339,664 (2,121,842) 33,848,149

Year 16 33,848,149 1,150,837 - 1,353,926 (2,171,045) 34,181,867

Year 17 34,181,867 1,162,183 - 1,367,275 (2,217,098) 34,494,228

Year 18 34,494,228 1,172,804 - 1,379,769 (2,260,203) 34,786,597

Year 19 34,786,597 1,182,744 - 1,391,464 (2,300,550) 35,060,255

Year 20 35,060,255 1,192,049 - 1,402,410 (2,338,315) 35,316,399

Year 21 35,316,399 1,200,758 - 1,412,656 (2,373,663) 35,556,149

Year 22 35,556,149 1,208,909 - 1,422,246 (2,406,749) 35,780,556

Year 23 35,780,556 1,216,539 - 1,431,222 (2,437,717) 35,990,600

Year 24 35,990,600 1,223,680 - 1,439,624 (2,466,703) 36,187,202

Year 25 36,187,202 1,230,365 - 1,447,488 (13,865,055) 25,000,000

9

Ownership

Al

Art

Holdco

FLLC

1.0%

99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

Assumptions (Continued):

Private Equity Valuation Discount 30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #1: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Various Financial FLLCs

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth Distributions

End of Year

Financial

Assets

Year 1

70,000,000

420,000

1,680,000

3,080,000

(2,100,000)

73,080,000

Year 2 73,080,000 438,480 1,753,920 3,215,520 (2,192,400) 76,295,520

Year 3 76,295,520 457,773 1,831,092 3,357,003 (2,288,866) 79,652,523

Year 4 79,652,523 477,915 1,911,661 3,504,711 (2,389,576) 83,157,234

Year 5 83,157,234 498,943 1,995,774 3,658,918 (2,494,717) 86,816,152

Year 6 86,816,152 520,897 2,083,588 3,819,911 (2,604,485) 90,636,063

Year 7 90,636,063 543,816 2,175,266 3,987,987 (2,719,082) 94,624,050

Year 8 94,624,050 567,744 2,270,977 4,163,458 (2,838,721) 98,787,508

Year 9 98,787,508 592,725 2,370,900 4,346,650 (2,963,625) 103,134,158

Year 10 103,134,158 618,805 2,475,220 4,537,903 (3,094,025) 107,672,061

Year 11 107,672,061 646,032 2,584,129 4,737,571 (3,230,162) 112,409,632

Year 12 112,409,632 674,458 2,697,831 4,946,024 (3,372,289) 117,355,656

Year 13 117,355,656 704,134 2,816,536 5,163,649 (3,520,670) 122,519,304

Year 14 122,519,304 735,116 2,940,463 5,390,849 (3,675,579) 127,910,154

Year 15 127,910,154 767,461 3,069,844 5,628,047 (3,837,305) 133,538,201

Year 16 133,538,201 801,229 3,204,917 5,875,681 (4,006,146) 139,413,881

Year 17 139,413,881 836,483 3,345,933 6,134,211 (4,182,416) 145,548,092

Year 18 145,548,092 873,289 3,493,154 6,404,116 (4,366,443) 151,952,208

Year 19 151,952,208 911,713 3,646,853 6,685,897 (4,558,566) 158,638,105

Year 20 158,638,105 951,829 3,807,315 6,980,077 (4,759,143) 165,618,182

Year 21 165,618,182 993,709 3,974,836 7,287,200 (4,968,545) 172,905,382

Year 22 172,905,382 1,037,432 4,149,729 7,607,837 (5,187,161) 180,513,219

Year 23 180,513,219 1,083,079 4,332,317 7,942,582 (5,415,397) 188,455,801

Year 24 188,455,801 1,130,735 4,522,939 8,292,055 (5,653,674) 196,747,856

Year 25 196,747,856 1,180,487 4,721,949 8,656,906 (5,902,436) 205,404,761

10

Assumptions (Continued):

Private Equity Valuation Discount 30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #1: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

3-Year GRAT Created by Al Art

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Holdco

LLC

Growth Distributions

Annual

Annuity

GRAT

Terminates

to Grantor

Trust

End of Year

Financial

Assets

Year 1

-

-

-

-

1,766,418

(1,766,418)

-

-

Year 2 - - - - 1,766,418 (1,766,418) - -

Year 3 - - - - 1,766,418 (1,766,418) - -

Year 4 - - - - - - - -

Year 5 - - - - - - - -

Year 6 - - - - - - - -

Year 7 - - - - - - - -

Year 8 - - - - - - - -

Year 9 - - - - - - - -

Year 10 - - - - - - - -

Year 11 - - - - - - - -

Year 12 - - - - - - - -

Year 13 - - - - - - - -

Year 14 - - - - - - - -

Year 15 - - - - - - - -

Year 16 - - - - - - - -

Year 17 - - - - - - - -

Year 18 - - - - - - - -

Year 19 - - - - - - - -

Year 20 - - - - - - - -

Year 21 - - - - - - - -

Year 22 - - - - - - - -

Year 23 - - - - - - - -

Year 24 - - - - - - - -

Year 25 - - - - - - - -

11

Assumptions (Continued):

Private Equity Valuation Discount 30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #1: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Grantor Trust Created by Al Art for the Benefit of Mrs. Art and their Children (GRAT Remaindermen)

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Holdco

LLC

Growth Distributions

GRAT Beneficiary

Terminates Distributions

Income

Taxes

End of Year

Financial

Assets

Year 1

-

-

-

-

-

-

-

-

-

Year 2 - - - - - - - - -

Year 3 - - - - - - - - -

Year 4 - - - - - - - - -

Year 5 - - - - - - - - -

Year 6 - - - - - - - - -

Year 7 - - - - - - - - -

Year 8 - - - - - - - - -

Year 9 - - - - - - - - -

Year 10 - - - - - - - - -

Year 11 - - - - - - - - -

Year 12 - - - - - - - - -

Year 13 - - - - - - - - -

Year 14 - - - - - - - - -

Year 15 - - - - - - - - -

Year 16 - - - - - - - - -

Year 17 - - - - - - - - -

Year 18 - - - - 9,092,709 - - - 9,092,709

Year 19 9,092,709 54,556 218,225 400,079 9,016,041 - (5,625,972) - 13,155,639

Year 20 13,155,639 78,934 315,735 578,848 9,073,665 - (6,496,818) - 16,706,004

Year 21 16,706,004 100,236 400,944 735,064 9,161,152 - (6,727,341) - 20,376,059

Year 22 20,376,059 122,256 489,025 896,547 9,261,890 - (6,966,357) - 24,179,420

Year 23 24,179,420 145,077 580,306 1,063,894 9,377,256 - (7,214,321) - 28,131,632

Year 24 28,131,632 168,790 675,159 1,237,792 9,508,279 - (7,471,707) - 32,249,945

Year 25 32,249,945 193,500 773,999 1,418,998 19,644,826 - (15,857,710) - 38,423,557

12

Assumptions (Continued):

Private Equity Valuation Discount 30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #1: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Note Between Al Art and Holdco LLC

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1

59,251,500

870,997

(870,997)

59,251,500

Year 2 59,251,500 870,997 (870,997) 59,251,500

Year 3 59,251,500 870,997 (870,997) 59,251,500

Year 4 59,251,500 870,997 (870,997) 59,251,500

Year 5 59,251,500 870,997 (1,128,862) 58,993,635

Year 6 58,993,635 867,206 (3,955,678) 55,905,163

Year 7 55,905,163 821,806 (4,131,712) 52,595,257

Year 8 52,595,257 773,150 (4,303,502) 49,064,905

Year 9 49,064,905 721,254 (4,473,707) 45,312,452

Year 10 45,312,452 666,093 (4,644,294) 41,334,251

Year 11 41,334,251 607,613 (4,816,744) 37,125,120

Year 12 37,125,120 545,739 (4,992,199) 32,678,661

Year 13 32,678,661 480,376 (5,171,563) 27,987,474

Year 14 27,987,474 411,416 (5,355,576) 23,043,313

Year 15 23,043,313 338,737 (5,544,868) 17,837,183

Year 16 17,837,183 262,207 (5,739,989) 12,359,401

Year 17 12,359,401 181,683 (5,941,443) 6,599,641

Year 18 6,599,641 97,015 (6,057,859) 638,796

Year 19 638,796 9,390 (648,187) -

Year 20 - - - -

Year 21 - - - -

Year 22 - - - -

Year 23 - - - -

Year 24 - - - -

Year 25 - - - -

13

Assumptions (Continued):

Private Equity Valuation Discount

30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Artwork Lease Payment (increasing by 6% per year) $1,000,000

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #2: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year) Long-

Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Mr. and Mrs. Al Art

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Private

Various Equity Holdco

FLLC FLLC FLLC

Growth Distributions Distributions Distributions

GRAT

Annuity

Note Trust

Payments Distributions

Artwork Consumption

Lease from these

Payments Sources

Income

Taxes

End of Year

Financial

Assets

Year 1

5,000,000

30,000

120,000

220,000

21,000

9,500

26,887

2,661,801

1,304,030

-

(1,000,000)

(2,000,000)

(852,300)

5,540,918

Year 2 5,540,918 33,246 132,982 243,800 21,924 10,742 26,887 2,661,801 1,304,030 - (1,075,000) (2,060,000) (1,084,396) 5,756,934

Year 3 5,756,934 34,542 138,166 253,305 22,889 11,905 26,887 2,661,801 1,304,030 - (1,155,625) (2,121,800) (1,271,182) 5,661,851

Year 4 5,661,851 33,971 135,884 249,121 23,896 12,993 - - 1,304,030 - (1,242,297) (2,185,454) (1,426,368) 2,567,627

Year 5 2,567,627 15,406 61,623 112,976 24,947 14,011 - - 2,349,600 - (1,335,469) (2,251,018) (1,559,703) -

Year 6 - - - - 26,045 14,964 - - 5,391,307 - (1,435,629) (2,318,548) (1,678,139) -

Year 7 - - - - 27,191 15,857 - - 5,675,013 - (1,543,302) (2,388,105) (1,786,655) -

Year 8 - - - - 28,387 16,692 - - 5,962,551 - (1,659,049) (2,459,748) (1,888,834) -

Year 9 - - - - 29,636 17,474 - - 6,257,185 - (1,783,478) (2,533,540) (1,987,277) -

Year 10 - - - - 30,940 18,205 - - 6,561,533 - (1,917,239) (2,609,546) (2,083,893) -

Year 11 - - - - 32,302 18,890 - - 6,877,776 - (2,061,032) (2,687,833) (2,180,103) -

Year 12 - - - - 33,723 19,531 - - 7,207,808 - (2,215,609) (2,768,468) (2,276,985) -

Year 13 - - - - 35,207 20,131 - - 7,553,343 - (2,381,780) (2,851,522) (2,375,379) -

Year 14 - - - - 36,756 20,693 - - 7,915,990 - (2,560,413) (2,937,067) (2,475,958) -

Year 15 - - - - 38,373 21,218 - - 8,297,312 - (2,752,444) (3,025,179) (2,579,280) -

Year 16 - - - - 40,061 21,710 - - 8,698,866 - (2,958,877) (3,115,935) (2,685,826) -

Year 17 - - - - 41,824 22,171 - - 9,122,236 - (3,180,793) (3,209,413) (2,796,025) -

Year 18 - - - - 43,664 22,602 91,842 - 12,598,478 - (3,419,353) (3,305,695) (2,910,276) 3,121,263

Year 19 3,121,263 18,728 74,910 137,336 45,586 23,006 89,171 - - 6,599,626 (3,675,804) (3,404,866) (3,028,955) -

Year 20 - - - - 47,591 23,383 91,685 - - 10,448,275 (3,951,489) (3,507,012) (3,152,433) -

Year 21 - - - - 49,685 23,737 95,475 - - 10,972,255 (4,247,851) (3,612,222) (3,281,078) -

Year 22 - - - - 51,872 24,067 100,317 - - 11,526,035 (4,566,440) (3,720,589) (3,415,262) -

Year 23 - - - - 54,154 24,377 106,043 - - 12,111,921 (4,908,923) (3,832,207) (3,555,365) -

Year 24 - - - - 56,537 24,667 112,525 - - 12,732,317 (5,277,092) (3,947,173) (3,701,781) -

Year 25 - - - - 59,024 138,651 205,628 - - 21,519,339 (5,672,874) (4,065,588) (12,184,180) -

14

Ownership

Al

Art

GRAT &

Grantor

Trust

1.0%

99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

Assumptions (Continued):

Private Equity Valuation Discount

30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Artwork Lease Payment (increasing by 6% per year) $1,000,000

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #2: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year) Long-

Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Holdco FLLC

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Private

Various Equity

FLLC FLLC

Growth Distributions Distributions

Artwork

Lease

Payments

Note

Payments Distributions

End of Year

Financial

Assets

Beginning

of Year

Artwork

Growth

End of Year

Artwork

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

2,079,000

940,500

1,000,000

(1,304,030)

(2,688,688)

26,782

10,000,000

800,000

10,800,000

10,826,782

Year 2 26,782 161 643 1,178 2,170,476 1,063,458 1,075,000 (1,304,030) (2,688,688) 344,980 10,800,000 864,000 11,664,000 12,008,980

Year 3 344,980 2,070 8,280 15,179 2,265,977 1,178,547 1,155,625 (1,304,030) (2,688,688) 977,939 11,664,000 933,120 12,597,120 13,575,059

Year 4 977,939 5,868 23,471 43,029 2,365,680 1,286,270 1,242,297 (1,304,030) - 4,640,523 12,597,120 1,007,770 13,604,890 18,245,412

Year 5 4,640,523 27,843 111,373 204,183 2,469,770 1,387,098 1,335,469 (2,349,600) - 7,826,659 13,604,890 1,088,391 14,693,281 22,519,940

Year 6 7,826,659 46,960 187,840 344,373 2,578,440 1,481,474 1,435,629 (5,391,307) - 8,510,067 14,693,281 1,175,462 15,868,743 24,378,811

Year 7 8,510,067 51,060 204,242 374,443 2,691,891 1,569,810 1,543,302 (5,675,013) - 9,269,802 15,868,743 1,269,499 17,138,243 26,408,044

Year 8 9,269,802 55,619 222,475 407,871 2,810,334 1,652,492 1,659,049 (5,962,551) - 10,115,091 17,138,243 1,371,059 18,509,302 28,624,393

Year 9 10,115,091 60,691 242,762 445,064 2,933,989 1,729,882 1,783,478 (6,257,185) - 11,053,772 18,509,302 1,480,744 19,990,046 31,043,818

Year 10 11,053,772 66,323 265,291 486,366 3,063,084 1,802,320 1,917,239 (6,561,533) - 12,092,861 19,990,046 1,599,204 21,589,250 33,682,111

Year 11 12,092,861 72,557 290,229 532,086 3,197,860 1,870,122 2,061,032 (6,877,776) - 13,238,970 21,589,250 1,727,140 23,316,390 36,555,360

Year 12 13,238,970 79,434 317,735 582,515 3,338,566 1,933,584 2,215,609 (7,207,808) - 14,498,605 23,316,390 1,865,311 25,181,701 39,680,306

Year 13 14,498,605 86,992 347,967 637,939 3,485,463 1,992,984 2,381,780 (7,553,343) - 15,878,386 25,181,701 2,014,536 27,196,237 43,074,624

Year 14 15,878,386 95,270 381,081 698,649 3,638,823 2,048,583 2,560,413 (7,915,990) - 17,385,217 27,196,237 2,175,699 29,371,936 46,757,153

Year 15 17,385,217 104,311 417,245 764,950 3,798,932 2,100,624 2,752,444 (8,297,312) - 19,026,411 29,371,936 2,349,755 31,721,691 50,748,103

Year 16 19,026,411 114,158 456,634 837,162 3,966,085 2,149,334 2,958,877 (8,698,866) - 20,809,796 31,721,691 2,537,735 34,259,426 55,069,222

Year 17 20,809,796 124,859 499,435 915,631 4,140,592 2,194,927 3,180,793 (9,122,236) - 22,743,797 34,259,426 2,740,754 37,000,181 59,743,977

Year 18 22,743,797 136,463 545,851 1,000,727 4,322,778 2,237,601 3,419,353 (12,598,478) (9,184,219) 12,623,873 37,000,181 2,960,014 39,960,195 52,584,068

Year 19 12,623,873 75,743 302,973 555,450 4,512,981 2,277,545 3,675,804 - (8,917,125) 15,107,244 39,960,195 3,196,816 43,157,011 58,264,255

Year 20 15,107,244 90,643 362,574 664,719 4,711,552 2,314,932 3,951,489 - (9,168,522) 18,034,631 43,157,011 3,452,561 46,609,571 64,644,203

Year 21 18,034,631 108,208 432,831 793,524 4,918,860 2,349,926 4,247,851 - (9,547,467) 21,338,365 46,609,571 3,728,766 50,338,337 71,676,702

Year 22 21,338,365 128,030 512,121 938,888 5,135,290 2,382,681 4,566,440 - (10,031,693) 24,970,122 50,338,337 4,027,067 54,365,404 79,335,526

Year 23 24,970,122 149,821 599,283 1,098,685 5,361,243 2,413,340 4,908,923 - (10,604,265) 28,897,151 54,365,404 4,349,232 58,714,636 87,611,787

Year 24 28,897,151 173,383 693,532 1,271,475 5,597,137 2,442,036 5,277,092 - (11,252,525) 33,099,280 58,714,636 4,697,171 63,411,807 96,511,087

Year 25 33,099,280 198,596 794,383 1,456,368 5,843,411 13,726,404 5,672,874 - (20,562,794) 40,228,522 63,411,807 5,072,945 68,484,752 108,713,274

15

Ownership

Al

Art

Holdco

FLLC

1.0%

99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

Assumptions (Continued):

Private Equity Valuation Discount

30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Artwork Lease Payment (increasing by 6% per year) $1,000,000

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #2: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year) Long-

Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Private Equity FLLC

Beginning

of Year

Private

Equity

Income

Tax

Free

Income

Growth Distributions

End of Year

Private

Equity

Year 1

25,000,000

850,000

-

1,000,000

(950,000)

25,900,000

Year 2 25,900,000 880,600 - 1,036,000 (1,074,200) 26,742,400

Year 3 26,742,400 909,242 - 1,069,696 (1,190,451) 27,530,886

Year 4 27,530,886 936,050 - 1,101,235 (1,299,262) 28,268,910

Year 5 28,268,910 961,143 - 1,130,756 (1,401,110) 28,959,699

Year 6 28,959,699 984,630 - 1,158,388 (1,496,439) 29,606,279

Year 7 29,606,279 1,006,613 - 1,184,251 (1,585,666) 30,211,477

Year 8 30,211,477 1,027,190 - 1,208,459 (1,669,184) 30,777,942

Year 9 30,777,942 1,046,450 - 1,231,118 (1,747,356) 31,308,154

Year 10 31,308,154 1,064,477 - 1,252,326 (1,820,525) 31,804,432

Year 11 31,804,432 1,081,351 - 1,272,177 (1,889,012) 32,268,949

Year 12 32,268,949 1,097,144 - 1,290,758 (1,953,115) 32,703,736

Year 13 32,703,736 1,111,927 - 1,308,149 (2,013,116) 33,110,697

Year 14 33,110,697 1,125,764 - 1,324,428 (2,069,276) 33,491,612

Year 15 33,491,612 1,138,715 - 1,339,664 (2,121,842) 33,848,149

Year 16 33,848,149 1,150,837 - 1,353,926 (2,171,045) 34,181,867

Year 17 34,181,867 1,162,183 - 1,367,275 (2,217,098) 34,494,228

Year 18 34,494,228 1,172,804 - 1,379,769 (2,260,203) 34,786,597

Year 19 34,786,597 1,182,744 - 1,391,464 (2,300,550) 35,060,255

Year 20 35,060,255 1,192,049 - 1,402,410 (2,338,315) 35,316,399

Year 21 35,316,399 1,200,758 - 1,412,656 (2,373,663) 35,556,149

Year 22 35,556,149 1,208,909 - 1,422,246 (2,406,749) 35,780,556

Year 23 35,780,556 1,216,539 - 1,431,222 (2,437,717) 35,990,600

Year 24 35,990,600 1,223,680 - 1,439,624 (2,466,703) 36,187,202

Year 25 36,187,202 1,230,365 - 1,447,488 (13,865,055) 25,000,000

16

Ownership

Al

Art

Holdco

FLLC

1.0%

99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

Assumptions (Continued):

Private Equity Valuation Discount

30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Artwork Lease Payment (increasing by 6% per year) $1,000,000

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #2: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year) Long-

Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Various Financial FLLCs

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth Distributions

End of Year

Financial

Assets

Year 1

70,000,000

420,000

1,680,000

3,080,000

(2,100,000)

73,080,000

Year 2 73,080,000 438,480 1,753,920 3,215,520 (2,192,400) 76,295,520

Year 3 76,295,520 457,773 1,831,092 3,357,003 (2,288,866) 79,652,523

Year 4 79,652,523 477,915 1,911,661 3,504,711 (2,389,576) 83,157,234

Year 5 83,157,234 498,943 1,995,774 3,658,918 (2,494,717) 86,816,152

Year 6 86,816,152 520,897 2,083,588 3,819,911 (2,604,485) 90,636,063

Year 7 90,636,063 543,816 2,175,266 3,987,987 (2,719,082) 94,624,050

Year 8 94,624,050 567,744 2,270,977 4,163,458 (2,838,721) 98,787,508

Year 9 98,787,508 592,725 2,370,900 4,346,650 (2,963,625) 103,134,158

Year 10 103,134,158 618,805 2,475,220 4,537,903 (3,094,025) 107,672,061

Year 11 107,672,061 646,032 2,584,129 4,737,571 (3,230,162) 112,409,632

Year 12 112,409,632 674,458 2,697,831 4,946,024 (3,372,289) 117,355,656

Year 13 117,355,656 704,134 2,816,536 5,163,649 (3,520,670) 122,519,304

Year 14 122,519,304 735,116 2,940,463 5,390,849 (3,675,579) 127,910,154

Year 15 127,910,154 767,461 3,069,844 5,628,047 (3,837,305) 133,538,201

Year 16 133,538,201 801,229 3,204,917 5,875,681 (4,006,146) 139,413,881

Year 17 139,413,881 836,483 3,345,933 6,134,211 (4,182,416) 145,548,092

Year 18 145,548,092 873,289 3,493,154 6,404,116 (4,366,443) 151,952,208

Year 19 151,952,208 911,713 3,646,853 6,685,897 (4,558,566) 158,638,105

Year 20 158,638,105 951,829 3,807,315 6,980,077 (4,759,143) 165,618,182

Year 21 165,618,182 993,709 3,974,836 7,287,200 (4,968,545) 172,905,382

Year 22 172,905,382 1,037,432 4,149,729 7,607,837 (5,187,161) 180,513,219

Year 23 180,513,219 1,083,079 4,332,317 7,942,582 (5,415,397) 188,455,801

Year 24 188,455,801 1,130,735 4,522,939 8,292,055 (5,653,674) 196,747,856

Year 25 196,747,856 1,180,487 4,721,949 8,656,906 (5,902,436) 205,404,761

17

Assumptions (Continued):

Private Equity Valuation Discount

30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Artwork Lease Payment (increasing by 6% per year) $1,000,000

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #2: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year) Long-

Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

3-Year GRAT Created by Al Art

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Holdco

LLC

Growth Distributions

Annual

Annuity

GRAT

Terminates

to Grantor

Trust

End of Year

Financial

Assets

Year 1

-

-

-

-

2,661,801

(2,661,801)

-

-

Year 2 - - - - 2,661,801 (2,661,801) - -

Year 3 - - - - 2,661,801 (2,661,801) - -

Year 4 - - - - - - - -

Year 5 - - - - - - - -

Year 6 - - - - - - - -

Year 7 - - - - - - - -

Year 8 - - - - - - - -

Year 9 - - - - - - - -

Year 10 - - - - - - - -

Year 11 - - - - - - - -

Year 12 - - - - - - - -

Year 13 - - - - - - - -

Year 14 - - - - - - - -

Year 15 - - - - - - - -

Year 16 - - - - - - - -

Year 17 - - - - - - - -

Year 18 - - - - - - - -

Year 19 - - - - - - - -

Year 20 - - - - - - - -

Year 21 - - - - - - - -

Year 22 - - - - - - - -

Year 23 - - - - - - - -

Year 24 - - - - - - - -

Year 25 - - - - - - - -

18

Assumptions (Continued):

Private Equity Valuation Discount

30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Artwork Lease Payment (increasing by 6% per year) $1,000,000

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #2: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year) Long-

Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Grantor Trust Created by Al Art for the Benefit of Mrs. Art and their Children (GRAT Remaindermen)

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Holdco

LLC

Growth Distributions

GRAT Beneficiary

Terminates Distributions

Income

Taxes

End of Year

Financial

Assets

Year 1

-

-

-

-

-

-

-

-

-

Year 2 - - - - - - - - -

Year 3 - - - - - - - - -

Year 4 - - - - - - - - -

Year 5 - - - - - - - - -

Year 6 - - - - - - - - -

Year 7 - - - - - - - - -

Year 8 - - - - - - - - -

Year 9 - - - - - - - - -

Year 10 - - - - - - - - -

Year 11 - - - - - - - - -

Year 12 - - - - - - - - -

Year 13 - - - - - - - - -

Year 14 - - - - - - - - -

Year 15 - - - - - - - - -

Year 16 - - - - - - - - -

Year 17 - - - - - - - - -

Year 18 - - - - 9,092,377 - - - 9,092,377

Year 19 9,092,377 54,554 218,217 400,065 8,827,953 - (6,599,626) - 11,993,540

Year 20 11,993,540 71,961 287,845 527,716 9,076,837 - (10,448,275) - 11,509,624

Year 21 11,509,624 69,058 276,231 506,423 9,451,992 - (10,972,255) - 10,841,074

Year 22 10,841,074 65,046 260,186 477,007 9,931,376 - (11,526,035) - 10,048,654

Year 23 10,048,654 60,292 241,168 442,141 10,498,222 - (12,111,921) - 9,178,556

Year 24 9,178,556 55,071 220,285 403,856 11,140,000 - (12,732,317) - 8,265,452

Year 25 8,265,452 49,593 198,371 363,680 20,357,166 - (21,519,339) - 7,714,922

19

Assumptions (Continued):

Private Equity Valuation Discount

30.00%

Various LLCs Valuation Discount 30.00%

Holdco LLC Valuation Discount 20.00%

Intra-Family Interest Rate (mid-term) - March 2015 1.47%

IRS §7520 Rate - March 2015 1.80%

Artwork Lease Payment (increasing by 6% per year) $1,000,000

Schedule 2

Mr. and Mrs. Al Art

Hypothetical Technique #2: This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Income Rate

Rate of Return Tax Free

Rate of Return Taxed at Capital Gain Rate

Turnover Rate (% of Capital Gains Recognized/Year) Long-

Term Capital Gain Tax Rate

Ordinary Tax Rate

Consumption (increasing 2.5% per year)

Financial

Assets

Private

Equity

Various LLC

Interests

Artwork

7.40% 7.40% 7.40% 8.00%

0.60% 3.40% 0.60% 0.00%

2.40% 0.00% 2.40% 0.00%

4.40% 4.00% 4.40% 8.00%

30.00% 10.00% 30.00% 0.00%

25.00%

44.60%

$2,000,000

Note Between Al Art and Holdco LLC

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1

88,709,536

1,304,030

(1,304,030)

88,709,536

Year 2 88,709,536 1,304,030 (1,304,030) 88,709,536

Year 3 88,709,536 1,304,030 (1,304,030) 88,709,536

Year 4 88,709,536 1,304,030 (1,304,030) 88,709,536

Year 5 88,709,536 1,304,030 (2,349,600) 87,663,967

Year 6 87,663,967 1,288,660 (5,391,307) 83,561,320

Year 7 83,561,320 1,228,351 (5,675,013) 79,114,658

Year 8 79,114,658 1,162,985 (5,962,551) 74,315,092

Year 9 74,315,092 1,092,432 (6,257,185) 69,150,338

Year 10 69,150,338 1,016,510 (6,561,533) 63,605,316

Year 11 63,605,316 934,998 (6,877,776) 57,662,538

Year 12 57,662,538 847,639 (7,207,808) 51,302,370

Year 13 51,302,370 754,145 (7,553,343) 44,503,172

Year 14 44,503,172 654,197 (7,915,990) 37,241,379

Year 15 37,241,379 547,448 (8,297,312) 29,491,516

Year 16 29,491,516 433,525 (8,698,866) 21,226,175

Year 17 21,226,175 312,025 (9,122,236) 12,415,964

Year 18 12,415,964 182,515 (12,598,478) -

Year 19 - - - -

Year 20 - - - -

Year 21 - - - -

Year 22 - - - -

Year 23 - - - -

Year 24 - - - -

Year 25 - - - -

Grat Gratuitous

Asset Page This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the

examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assets* (assumed value and basis)

Grat

Gratuitous

FMV: Financial Assets $300,000

Basis: Financial Assets $300,000

FMV: Single Stock Position $10,000,000

Basis: Single Stock Position $0

Total FMV: $10,300,000

Total Basis: $300,000 * Information provided by client. There is no proposed planning for Grat Gratuitous' other assets.

1

3-Year

Future Values

Present

Values

(Discounted

at 2.5%)

Percentage

of Total

No Further Planning

Schedule 3

Grat Gratuitous

Hypothetical Integrated Income and Estate Tax Plan Comparisons

Scenario A: $300,000 in Financial Assets Earn 7.4% Annually and $10,000,000 in Stock Earns 0.0% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein.

These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Grat Gratuitous 10,363,852 9,623,867 99.92%

Gratuitous Children - - 0.00%

IRS & State Income Tax - Direct Cost 7,360 6,834 0.07%

IRS & State Income Tax - Investment Opportunity Costs 438 407 0.00%

Total $10,371,650 $9,631,108 100.00%

Leveraged FLLC Asset GRAT Grat Gratuitous 8,670,403 8,051,331 83.60%

Gratuitous Children 1,693,449 1,572,536 16.33%

IRS & State Income Tax - Direct Cost 7,360 6,834 0.07%

IRS & State Income Tax - Investment Opportunity Costs 438 407 0.00%

Total $10,371,650 $9,631,108 100.00%

2

Schedule 3

Grat Gratuitous

No Further Planning

Scenario A: $300,000 in Financial Assets Earn 7.4% Annually and $10,000,000 in Stock Earns 0.0% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and

no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Rates

Rate of Return Tax Free

Rate of Return Taxed at Capital Gains Rates

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gains and Health Care Tax Rate

Ordinary Income and Health Care Tax Rate

Financial

Assets

Single

Stock

7.40% 0.00%

0.40% 0.00%

2.60% 0.00%

4.40% 0.00%

30.00% 0.00%

27.27%

46.87%

Grat Gratuitous

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Growth

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

300,000

1,200

7,800

13,200

(1,642)

320,558

10,000,000

-

10,000,000

10,320,558

Year 2 320,558 1,282 8,335 14,105 (2,510) 341,769 10,000,000 - 10,000,000 10,341,769

Year 3 341,769 1,367 8,886 15,038 (3,207) 363,852 10,000,000 - 10,000,000 10,363,852

3

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Rates

Rate of Return Tax Free

Rate of Return Taxed at Capital Gains Rates

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gains and Health Care Tax Rate

Ordinary Income and Health Care Tax Rate

Financial

Assets

Single

Stock

7.40% 0.00%

0.40% 0.00%

2.60% 0.00%

4.40% 0.00%

30.00% 0.00% 27.27%

46.87%

Growth Interest Ownership

Growth

Grant Holdco

Gratuitous FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT #1

&

Grant Grantor

Gratuitous Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT #2

&

Grant Grantor

Gratuitous Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 1,517,400 7,284 (7,284) 1,517,400

Year 2 1,517,400 7,284 (7,284) 1,517,400

Year 3 1,517,400 7,284 (503,966) 1,020,718

Schedule 3

Grat Gratuitous

Leveraged FLLC Asset GRAT

Scenario A: $300,000 in Financial Assets Earn 7.4% Annually and $10,000,000 in Stock Earns 0.0% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Grat Gratuitous

Assumptions (continued):

Single Stock FLLC Valuation Discount 30.00%

Single Stock FLLC Preferred Interest $8,000,000

Single Stock FLLC Preferred Coupon 7.00%

Preferred Holdco FLLC Valuation Discount 20.00%

Growth Holdco FLLC Valuation Discount 20.00% IRS §7520 Rate 2.00%

Assumed Interest Rate 0.48%

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Holdco FLLC

Growth Distributions

Note #2

Payments

GRAT #2

Annuity

Payments

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Single

Stock FLP Preferred

Growth Holdco FLLC

Growth Distributions Distributions

GRAT #1

Annuity

Payments

Note #1

& Note #2

Payments

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1 - - - - 468 7,284 46,302 (1,642) 52,411 - - - 2,219 219,702 34,560 256,482 308,893

Year 2 52,411 210 1,363 2,306 468 7,284 46,302 (2,510) 107,833 256,482 - - 2,219 219,702 34,560 512,963 620,796

Year 3 107,833 431 2,804 4,745 468 204,477 46,302 (3,207) 363,852 512,963 - 3,200 19,325 219,702 7,551,360 8,306,551 8,670,403

Single Stock FLLC

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Growth Distributions

End of Year

Financial

Assets

Beginning

of Year

Stock

Preferred Growth

Growth Distributions Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

10,000,000

-

(560,000)

-

9,440,000

9,440,000

Year 2 - - - - - - 9,440,000 - (560,000) - 8,880,000 8,880,000

Year 3 - - - - - - 8,880,000 - (8,560,000) (320,000) - -

Preferred Holdco FLLC

Beginning

of Year

Stock

Income

Tax

Free

Income

Owner

Growth Distributions

End of Year

Financial

Assets

Beginning

of Year

Stock

Single

Stock FLP

Preferred

Growth Distributions

Note #1 Owner

Payments Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

-

560,000

(34,560)

(221,922)

303,518

303,518

Year 2 - - - - - - 303,518 - 560,000 (34,560) (221,922) 607,037 607,037

Year 3 - - - - - - 607,037 - 8,560,000 (7,234,560) (1,932,477) - -

Growth Holdco FLLC

Beginning

of Year

Stock

Income

Tax

Free

Income

Growth

Note #2 Owner

Payments Distributions

End of Year

Financial

Assets

Beginning

of Year

Stock

Single

Stock FLP

Growth

Growth Distributions

Note #2

Payments

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1 300,000 1,200 7,800 13,200 (7,284) (46,770) 268,146 - - - - - 268,146

Year 2 268,146 1,073 6,972 11,798 (7,284) (46,770) 233,936 - - - - - 233,936

Year 3 233,936 936 6,082 10,293 (204,477) (46,770) - - - 316,800 (316,800) - -

GRAT #1

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

End of Year

Financial

Assets

Beginning

of Year

Stock

Preferred

Holdco

FLLC

Growth Distributions

Annual

Annuity

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

219,702

(219,702)

-

-

Year 2 - - - - - - - 219,702 (219,702) - -

Year 3 - - - - - - - 219,702 (219,702) - -

GRAT #2

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Holdco FLLC

Growth Distributions

Annual

Annuity

End of Year

Financial

Assets

Year 1 - - - - 46,302 (46,302) -

Year 2 - - - - 46,302 (46,302) -

Year 3 - - - - 46,302 (46,302) -

Grantor Trust

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Holdco FLLC Beneficiary

Growth Distributions Distributions

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Preferred

Holdco FLLC

Growth Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

- -

-

-

-

-

-

-

-

-

Year 2 - - - - - - - - - - - - -

Year 3 - - - - - - - - - - 1,693,449 1,693,449 1,693,449

Note #1 Between Grat Gratuitous and Preferred Holdco FLLC Note #2 Between Grat Gratuitous and Growth Holdco FLLC

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 7,200,000 34,560 (34,560) 7,200,000

Year 2 7,200,000 34,560 (34,560) 7,200,000

Year 3 7,200,000 34,560 (7,234,560) -

4

3-Year

Future Values

Present

Values

(Discounted

at 2.5%)

Percentage

of Total

No Further Planning

Schedule 3

Grat Gratuitous

Hypothetical Integrated Income and Estate Tax Plan Comparisons

Scenario B: $300,000 in Financial Assets Earn 7.4% Annually and $10,000,000 in Stock Earns 9.44% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein.

These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Grat Gratuitous 13,473,307 12,511,305 99.94%

Gratuitous Children - - 0.00%

IRS & State Income Tax - Direct Cost 7,360 6,834 0.05%

IRS & State Income Tax - Investment Opportunity Costs 438 407 0.00%

Total $13,481,105 $12,518,546 100.00%

Leveraged FLLC Asset GRAT Grat Gratuitous 9,798,244 9,098,643 72.68%

Gratuitous Children 3,675,064 3,412,662 27.26%

IRS & State Income Tax - Direct Cost 7,360 6,834 0.05%

IRS & State Income Tax - Investment Opportunity Costs 438 407 0.00%

Total $13,481,105 $12,518,546 100.00%

Traditional GRAT Grat Gratuitous 11,779,858 10,938,769 87.38%

Gratuitous Children 1,693,449 1,572,536 12.56%

IRS & State Income Tax - Direct Cost 7,360 6,834 0.05%

IRS & State Income Tax - Investment Opportunity Costs 438 407 0.00%

Total $13,481,105 $12,518,546 100.00%

5

Schedule 3

Grat Gratuitous

No Further Planning

Scenario B: $300,000 in Financial Assets Earn 7.4% Annually and $10,000,000 in Stock Earns 9.44% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client

will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Rates

Rate of Return Tax Free

Rate of Return Taxed at Capital Gains Rates

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gains and Health Care Tax Rate

Ordinary Income and Health Care Tax Rate

Financial

Assets

Single

Stock

7.40% 9.44%

0.40% 0.00%

2.60% 0.00%

4.40% 9.44%

30.00% 0.00%

27.27%

46.87%

Grat Gratuitous

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Growth

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

300,000

1,200

7,800

13,200

(1,642)

320,558

10,000,000

944,474

10,944,474

11,265,032

Year 2 320,558 1,282 8,335 14,105 (2,510) 341,769 10,944,474 1,033,677 11,978,150 12,319,919

Year 3 341,769 1,367 8,886 15,038 (3,207) 363,852 11,978,150 1,131,305 13,109,455 13,473,307

6

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Rates

Rate of Return Tax Free

Rate of Return Taxed at Capital Gains Rates

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gains and Health Care Tax Rate

Ordinary Income and Health Care Tax Rate

Financial

Assets

Single

Stock

7.40% 9.44%

0.40% 0.00%

2.60% 0.00%

4.40% 9.44%

30.00% 0.00% 27.27%

46.87%

Growth Interest

Ownership

Growth

Grant Holdco

Gratuitous FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT #1

&

Grant Grantor

Gratuitous Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT #2

&

Grant Grantor

Gratuitous Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 1,517,400 7,284 (7,284) 1,517,400

Year 2 1,517,400 7,284 (7,284) 1,517,400

Year 3 1,517,400 7,284 (1,524,684) -

Schedule 3

Grat Gratuitous

Leveraged FLLC Asset GRAT

Scenario B: $300,000 in Financial Assets Earn 7.4% Annually and $10,000,000 in Stock Earns 9.44% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Grat Gratuitous

Assumptions (continued):

Single Stock FLLC Valuation Discount 30.00%

Single Stock FLLC Preferred Interest $8,000,000

Single Stock FLLC Preferred Coupon 7.00%

Preferred Holdco FLLC Valuation Discount 20.00%

Growth Holdco FLLC Valuation Discount 20.00% IRS §7520 Rate 2.00%

Assumed Interest Rate 0.48%

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Holdco FLLC

Growth Distributions

Note #2

Payments

GRAT #2

Annuity

Payments

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Single

Stock FLP Preferred Growth

Growth Holdco FLLC Holdco FLLC

Growth Distributions Distributions Distributions

GRAT #1

Annuity

Payments

Note #1

& Note #2

Payments

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1 - - - - 468 7,284 46,302 (1,642) 52,411 - - - 2,219 - 219,702 34,560 256,482 308,893

Year 2 52,411 210 1,363 2,306 468 7,284 46,302 (2,510) 107,833 256,482 24,224 - 2,219 - 219,702 34,560 537,187 645,020

Year 3 107,833 431 2,804 4,745 468 204,477 46,302 (3,207) 363,852 537,187 50,736 32,658 20,212 19,129 219,702 8,554,766 9,434,391 9,798,244

Single Stock FLLC

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Growth Distributions

End of Year

Financial

Assets

Beginning

of Year

Stock

Preferred Growth

Growth Distributions Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

10,000,000

944,474

(560,000)

-

10,384,474

10,384,474

Year 2 - - - - - - 10,384,474 980,786 (560,000) - 10,805,260 10,805,260

Year 3 - - - - - - 10,805,260 1,020,528 (8,560,000) (3,265,788) - -

Preferred Holdco FLLC

Beginning

of Year

Stock

Income

Tax

Free

Income

Owner

Growth Distributions

End of Year

Financial

Assets

Beginning

of Year

Stock

Single

Stock FLP

Preferred

Growth Distributions

Note #1 Owner

Payments Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

-

560,000

(34,560)

(221,922)

303,518

303,518

Year 2 - - - - - - 303,518 28,667 560,000 (34,560) (221,922) 635,703 635,703

Year 3 - - - - - - 635,703 60,040 8,560,000 (7,234,560) (2,021,184) - -

Growth Holdco FLLC

Beginning

of Year

Stock

Income

Tax

Free

Income

Growth

Note #2 Owner

Payments Distributions

End of Year

Financial

Assets

Beginning

of Year

Stock

Single

Stock FLP

Growth

Growth Distributions

Note #2 Owner

Payments Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

300,000

1,200

7,800

13,200

(7,284)

(46,770)

268,146

-

-

-

-

-

-

268,146

Year 2 268,146 1,073 6,972 11,798 (7,284) (46,770) 233,936 - - - - - - 233,936

Year 3 233,936 936 6,082 10,293 (204,477) (46,770) - - - 3,233,130 (1,320,206) (1,912,924) - -

GRAT #1

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

End of Year

Financial

Assets

Beginning

of Year

Stock

Preferred

Holdco

FLLC

Growth Distributions

Annual

Annuity

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

219,702

(219,702)

-

-

Year 2 - - - - - - - 219,702 (219,702) - -

Year 3 - - - - - - - 219,702 (219,702) - -

GRAT #2

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Holdco FLLC

Growth Distributions

Annual

Annuity

End of Year

Financial

Assets

Year 1 - - - - 46,302 (46,302) -

Year 2 - - - - 46,302 (46,302) -

Year 3 - - - - 46,302 (46,302) -

Grantor Trust

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Holdco FLLC Beneficiary

Growth Distributions Distributions

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Preferred Growth

Holdco FLLC Holdco FLLC

Growth Distributions Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

- -

-

-

-

-

-

-

-

-

-

Year 2 - - - - - - - - - - - - - -

Year 3 - - - - - - - - - - 1,781,269 1,893,794 3,675,064 3,675,064

Note #1 Between Grat Gratuitous and Preferred Holdco FLLC Note #2 Between Grat Gratuitous and Growth Holdco FLLC

Beginning

of Year

Principal Interest

Note

Payments

End of Year

Principal

Year 1 7,200,000 34,560 (34,560) 7,200,000

Year 2 7,200,000 34,560 (34,560) 7,200,000

Year 3 7,200,000 34,560 (7,234,560) -

7

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Rates

Rate of Return Tax Free

Rate of Return Taxed at Capital Gains Rates

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gains and Health Care Tax Rate

Ordinary Income and Health Care Tax Rate

Financial

Assets

Single

Stock

7.40% 9.44%

0.40% 0.00%

2.60% 0.00%

4.40% 9.44%

30.00% 0.00%

27.27%

46.87%

Schedule 3

Grat Gratuitous

Traditional GRAT

Scenario B: $300,000 in Financial Assets Earn 7.4% Annually and $10,000,000 in Stock Earns 9.44% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client

will or is likely to achieve the results shown.

Assumptions (continued):

IRS §7520 Rate 2.00%

Grat Gratuitous Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Growth

Annual

Annuity

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

300,000

1,200

7,800

13,200

(1,642)

320,558

-

-

3,467,526

3,467,526

3,788,084

Year 2 320,558 1,282 8,335 14,105 (2,510) 341,769 3,467,526 327,499 3,467,526 7,262,551 7,604,319

Year 3 341,769 1,367 8,886 15,038 (3,207) 363,852 7,262,551 685,929 3,467,526 11,416,005 11,779,858

3-Year GRAT

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Growth

Annual

Annuity

GRAT

Terminates

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

10,000,000

944,474

(3,467,526)

-

7,476,948

7,476,948

Year 2 - - - - - - 7,476,948 706,178 (3,467,526) - 4,715,600 4,715,600

Year 3 - - - - - - 4,715,600 445,376 (3,467,526) (1,693,449) - -

Grantor Trust (GRAT Remaindermen) Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Growth

GRAT

Terminates

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

-

-

-

-

Year 2 - - - - - - - - - - -

Year 3 - - - - - - - - 1,693,449 1,693,449 1,693,449

8

3-Year

Future Values

Present

Values

(Discounted

at 2.5%)

Percentage

of Total

No Further Planning

Schedule 3

Grat Gratuitous

Hypothetical Integrated Income and Estate Tax Plan Comparisons

Scenario C: $300,000 in Financial Assets Earn 7.40% Annually and $10,000,000 in Stock Earns 16.76% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein.

These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Grat Gratuitous 16,282,662 15,120,070 99.95%

Gratuitous Children - - 0.00%

IRS & State Income Tax - Direct Cost 7,360 6,834 0.05%

IRS & State Income Tax - Investment Opportunity Costs 438 407 0.00%

Total $16,290,459 $15,127,311 100.00%

Leveraged FLLC Asset GRAT Grat Gratuitous 9,913,439 9,205,614 60.85%

Gratuitous Children 6,369,222 5,914,456 39.10%

IRS & State Income Tax - Direct Cost 7,360 6,834 0.05%

IRS & State Income Tax - Investment Opportunity Costs 438 407 0.00%

Total $16,290,459 $15,127,311 100.00%

Traditional GRAT Grat Gratuitous 12,607,598 11,707,408 77.39%

Gratuitous Children 3,675,064 3,412,662 22.56%

IRS & State Income Tax - Direct Cost 7,360 6,834 0.05%

IRS & State Income Tax - Investment Opportunity Costs 438 407 0.00%

Total $16,290,459 $15,127,311 100.00%

9

Schedule 3

Grat Gratuitous

No Further Planning

Scenario C: $300,000 in Financial Assets Earn 7.40% Annually and $10,000,000 in Stock Earns 16.76% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client

will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Rates

Rate of Return Tax Free

Rate of Return Taxed at Capital Gains Rates

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gains and Health Care Tax Rate

Ordinary Income and Health Care Tax Rate

Financial

Assets

Single

Stock

7.40% 16.76%

0.40% 0.00%

2.60% 0.00%

4.40% 16.76%

30.00% 0.00%

27.27%

46.87%

Grat Gratuitous

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Growth

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

300,000

1,200

7,800

13,200

(1,642)

320,558

10,000,000

1,676,254

11,676,254

11,996,812

Year 2 320,558 1,282 8,335 14,105 (2,510) 341,769 11,676,254 1,957,237 13,633,490 13,975,259

Year 3 341,769 1,367 8,886 15,038 (3,207) 363,852 13,633,490 2,285,319 15,918,809 16,282,662

10

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Rates

Rate of Return Tax Free

Rate of Return Taxed at Capital Gains Rates

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gains and Health Care Tax Rate

Ordinary Income and Health Care Tax Rate

Financial

Assets

Single

Stock

7.40% 16.76%

0.40% 0.00%

2.60% 0.00%

4.40% 16.76%

30.00% 0.00% 27.27%

46.87%

Growth Interest

Ownership

Growth

Grant Holdco

Gratuitous FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT #1

&

Grant Grantor

Gratuitous Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

GRAT #2

&

Grant Grantor

Gratuitous Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Beginning

of Year

Principal

Interest

Note

Payments

End of Year

Principal

Year 1 1,517,400 7,284 (7,284) 1,517,400

Year 2 1,517,400 7,284 (7,284) 1,517,400

Year 3 1,517,400 7,284 (1,524,684) -

Schedule 3

Grat Gratuitous

Leveraged FLLC Asset GRAT

Scenario C: $300,000 in Financial Assets Earn 7.40% Annually and $10,000,000 in Stock Earns 16.76% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Grat Gratuitous

Assumptions (continued):

Single Stock FLLC Valuation Discount 30.00%

Single Stock FLLC Preferred Interest $8,000,000

Single Stock FLLC Preferred Coupon 7.00%

Preferred Holdco FLLC Valuation Discount 20.00%

Growth Holdco FLLC Valuation Discount 20.00% IRS §7520 Rate 2.00%

Assumed Interest Rate 0.48%

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Holdco FLLC

Growth Distributions

Note #2

Payments

GRAT #2

Annuity

Payments

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Single

Stock FLP Preferred Growth

Growth Holdco FLLC Holdco FLLC

Growth Distributions Distributions Distributions

GRAT #1

Annuity

Payments

Note #1

& Note #2

Payments

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1 - - - - 468 7,284 46,302 (1,642) 52,411 - - - 2,219 - 219,702 34,560 256,482 308,893

Year 2 52,411 210 1,363 2,306 468 7,284 46,302 (2,510) 107,833 256,482 42,993 - 2,219 - 219,702 34,560 555,956 663,789

Year 3 107,833 431 2,804 4,745 468 204,477 46,302 (3,207) 363,852 555,956 93,192 59,415 20,936 45,618 219,702 8,554,766 9,549,587 9,913,439

Single Stock FLLC

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Growth Distributions

End of Year

Financial

Assets

Beginning

of Year

Stock

Preferred Growth

Growth Distributions Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

10,000,000

1,676,254

(560,000)

-

11,116,254

11,116,254

Year 2 - - - - - - 11,116,254 1,863,366 (560,000) - 12,419,620 12,419,620

Year 3 - - - - - - 12,419,620 2,081,844 (8,560,000) (5,941,464) - -

Preferred Holdco FLLC

Beginning

of Year

Stock

Income

Tax

Free

Income

Owner

Growth Distributions

End of Year

Financial

Assets

Beginning

of Year

Stock

Single

Stock FLP

Preferred

Growth Distributions

Note #1 Owner

Payments Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

-

560,000

(34,560)

(221,922)

303,518

303,518

Year 2 - - - - - - 303,518 50,877 560,000 (34,560) (221,922) 657,914 657,914

Year 3 - - - - - - 657,914 110,283 8,560,000 (7,234,560) (2,093,637) - -

Growth Holdco FLLC

Beginning

of Year

Stock

Income

Tax

Free

Income

Growth

Note #2 Owner

Payments Distributions

End of Year

Financial

Assets

Beginning

of Year

Stock

Single

Stock FLP

Growth

Growth Distributions

Note #2 Owner

Payments Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

300,000

1,200

7,800

13,200

(7,284)

(46,770)

268,146

-

-

-

-

-

-

268,146

Year 2 268,146 1,073 6,972 11,798 (7,284) (46,770) 233,936 - - - - - - 233,936

Year 3 233,936 936 6,082 10,293 (204,477) (46,770) - - - 5,882,049 (1,320,206) (4,561,843) - -

GRAT #1

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

End of Year

Financial

Assets

Beginning

of Year

Stock

Preferred

Holdco

FLLC

Growth Distributions

Annual

Annuity

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

219,702

(219,702)

-

-

Year 2 - - - - - - - 219,702 (219,702) - -

Year 3 - - - - - - - 219,702 (219,702) - -

GRAT #2

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Holdco FLLC

Growth Distributions

Annual

Annuity

End of Year

Financial

Assets

Year 1 - - - - 46,302 (46,302) -

Year 2 - - - - 46,302 (46,302) -

Year 3 - - - - 46,302 (46,302) -

Grantor Trust

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Holdco FLLC Beneficiary

Growth Distributions Distributions

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Preferred Growth

Holdco FLLC Holdco FLLC

Growth Distributions Distributions

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

- -

-

-

-

-

-

-

-

-

-

Year 2 - - - - - - - - - - - - - -

Year 3 - - - - - - - - - - 1,852,998 4,516,224 6,369,222 6,369,222

Note #1 Between Grat Gratuitous and Preferred Holdco FLLC Note #2 Between Grat Gratuitous and Growth Holdco FLLC

Beginning

of Year

Principal Interest

Note

Payments

End of Year

Principal

Year 1 7,200,000 34,560 (34,560) 7,200,000

Year 2 7,200,000 34,560 (34,560) 7,200,000

Year 3 7,200,000 34,560 (7,234,560) -

11

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Rates

Rate of Return Tax Free

Rate of Return Taxed at Capital Gains Rates

Turnover Rate (% of Capital Gains Recognized/Year)

Long-Term Capital Gains and Health Care Tax Rate

Ordinary Income and Health Care Tax Rate

Financial

Assets

Single

Stock

7.40% 16.76%

0.40% 0.00%

2.60% 0.00%

4.40% 16.76%

30.00% 0.00%

27.27%

46.87%

Schedule 3

Grat Gratuitous

Traditional GRAT

Scenario C: $300,000 in Financial Assets Earn 7.40% Annually and $10,000,000 in Stock Earns 16.76% Annually This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client

will or is likely to achieve the results shown.

Assumptions (continued):

IRS §7520 Rate 2.00%

Grat Gratuitous Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Growth

Annual

Annuity

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

300,000

1,200

7,800

13,200

(1,642)

320,558

-

-

3,467,526

3,467,526

3,788,084

Year 2 320,558 1,282 8,335 14,105 (2,510) 341,769 3,467,526 581,245 3,467,526 7,516,297 7,858,066

Year 3 341,769 1,367 8,886 15,038 (3,207) 363,852 7,516,297 1,259,922 3,467,526 12,243,746 12,607,598

3-Year GRAT

Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Growth

Annual

Annuity

GRAT

Terminates

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

10,000,000

1,676,254

(3,467,526)

-

8,208,728

8,208,728

Year 2 - - - - - - 8,208,728 1,375,991 (3,467,526) - 6,117,193 6,117,193

Year 3 - - - - - - 6,117,193 1,025,397 (3,467,526) (3,675,064) - -

Grantor Trust (GRAT Remaindermen) Beginning

of Year

Financial

Assets

Income

Tax

Free

Income

Growth

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Stock

Growth

GRAT

Terminates

End of Year

Stock

End of Year

Financial

& Other

Assets

Year 1

-

-

-

-

-

-

-

-

-

-

-

Year 2 - - - - - - - - - - -

Year 3 - - - - - - - - 3,675,064 3,675,064 3,675,064

12

1

Pre-Death

Post-Death

Present Value

(Discounted at 3%)

Percentage

of Total

No Furhter Planning; Bequeaths Estate to Family

100,513,787 - - 0.00%

- 55,282,583 30,608,626 34.52%

13,317,021 13,317,021 7,373,312 8.32%

2,687,037 2,687,037 1,487,747 1.68%

3,022,654 3,022,654 1,673,570 1.89%

20,916,430 20,916,430 11,580,920 13.06%

19,680,241 19,680,241 10,896,472 12.29%

- 45,231,204 25,043,421 28.25%

$160,137,171 $160,137,171 $88,664,069 100.00%

Hypothetical Integrated Income and Estate Tax Plan With a Partnership; Bequeaths Remaining Estate to Family

12,579,217 - - 0.00%

- 6,918,569 3,830,644 4.47%

98,772,116 98,772,116 54,687,726 63.79%

2,687,037 2,687,037 1,487,747 1.74%

3,022,654 3,022,654 1,673,570 1.95%

20,556,056 20,556,056 11,381,390 13.28%

17,225,727 17,225,727 9,537,467 11.12%

- 5,660,647 3,134,163 3.66%

$154,842,807 $154,842,807 $85,732,708 100.00%

Schedule 4

Leverage Family

Hypothetical Integrated Income and Estate Tax Plan Comparisons - 20 Year Term Scenario

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are

for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Lenny Leverage

Leverage Children

Leverage GST Trust

Consumption - Direct Cost

Consumption - Investment Opportunity Cost

IRS - Income Tax

IRS - Investment Opportunity Costs

IRS - Estate Tax (at 45%)

Total

Lenny Leverage

Leverage Children

Leverage GST Trust

Consumption - Direct Cost

Consumption - Investment Opportunity Cost

IRS - Income Tax

IRS - Investment Opportunity Costs

IRS - Estate Tax (at 45%)

Total

2

Schedule 4

Leverage Family

Asset Page*

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown

herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Lenny Leverage

Asset: Miscellaneous Investments

$30,000,000 Basis: Miscellaneous Investments $30,000,000

GST Trust

Asset: Cash

$2,857,143

Basis: Cash $2,857,143

Other Miscellaneous Assets

Asset: Cash

$1,500,000

Basis: Cash $1,500,000

Total Assets

$34,357,143

Total Basis $34,357,143

* Information provided by client. There is no proposed planning for Lenny Leverage's other assets

3

Schedule 4

Leverage Family

No Further Planning

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes

only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Rate of Return Taxed at Ordinary Rates

2.00%

Rate of Return Taxed at Capital Gains Rates 6.00%

Long-Term Capital Gain Tax Rate 18.25%

Ordinary Tax Rate 38.25%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Consumption (with 3% inflation adjustment each year) 100,000

Lenny Leverage

Beg. of Year Income Growth Income Taxes Consumption End of Year

Year 1

31,500,000

630,000

1,890,000

(375,695)

(100,000)

33,544,305

Year 2 33,544,305 670,886 2,012,658 (479,554) (103,000) 35,645,296

Year 3 35,645,296 712,906 2,138,718 (565,757) (106,090) 37,825,072

Year 4 37,825,072 756,501 2,269,504 (640,277) (109,273) 40,101,528

Year 5 40,101,528 802,031 2,406,092 (707,383) (112,551) 42,489,716

Year 6 42,489,716 849,794 2,549,383 (770,140) (115,927) 45,002,826

Year 7 45,002,826 900,057 2,700,170 (830,769) (119,405) 47,652,878

Year 8 47,652,878 953,058 2,859,173 (890,898) (122,987) 50,451,223

Year 9 50,451,223 1,009,024 3,027,073 (951,739) (126,677) 53,408,905

Year 10 53,408,905 1,068,178 3,204,534 (1,014,212) (130,477) 56,536,928

Year 11 56,536,928 1,130,739 3,392,216 (1,079,042) (134,392) 59,846,449

Year 12 59,846,449 1,196,929 3,590,787 (1,146,810) (138,423) 63,348,931

Year 13 63,348,931 1,266,979 3,800,936 (1,218,011) (142,576) 67,056,258

Year 14 67,056,258 1,341,125 4,023,376 (1,293,075) (146,853) 70,980,831

Year 15 70,980,831 1,419,617 4,258,850 (1,372,398) (151,259) 75,135,641

Year 16 75,135,641 1,502,713 4,508,138 (1,456,353) (155,797) 79,534,342

Year 17 79,534,342 1,590,687 4,772,061 (1,545,306) (160,471) 84,191,313

Year 18 84,191,313 1,683,826 5,051,479 (1,639,622) (165,285) 89,121,712

Year 19 89,121,712 1,782,434 5,347,303 (1,739,674) (170,243) 94,341,532

Year 20 94,341,532 1,886,831 5,660,492 (1,199,716) (175,351) 100,513,787

4

Schedule 4

Leverage Family

No Further Planning

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes

only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

2.00%

6.00%

18.25%

38.25%

30.00%

100,000

Rate of Return Taxed at Ordinary Rates Rate of Return Taxed at Capital Gains Rates

Long-Term Capital Gain Tax Rate

Ordinary Tax Rate

Turnover Rate (% of Capital Gains Recognized/Year)

Consumption (with 3% inflation adjustment each year)

Leverage GST Trust

Beg. of Year Income Growth Income Taxes End of Year

5

Schedule 4

Leverage Family

Hypothetical Integrated Income and Estate Tax Plan With a Partnership; Bequeaths Remaining Estate to Family

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is

likely to achieve the results shown.

Assumptions: FLP

Lenny Leverage Rate of Return Taxed at Ordinary Rates 2.00%

Rate of Return Taxed at Ordinary Rates 2.00% Rate of Return Taxed at Capital Gains Rates 6.00% Rate

of Return Taxed at Capital Gains Rates 6.00% Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Long-Term

Capital Gain Tax Rate 15.00% Lenny Leverage Percentage Ownership in Leverage FLP 8.70% Ordinary Tax Rate

35.00% GRAT Percentage Ownership in Leverage FLP 91.30% Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

GRAT Annuity* (20% Increasing Annuity) 146,297

Consumption (increasing at 3% per year) 100,000 Leverage FLP Valuation Discount 30.00%

Intra-Family Note Interest Percentage 2.06%

7520 Rate 2.40%

*based on nominal amount of $21,000,000 [$30,000,000 (1-30%)]

Leverage FLP

Beginning of Year Income Growth Distributions End of Year

Year 1

32,857,143

657,143

1,971,429

(1,961,571)

33,524,143

Year 2 33,524,143 670,483 2,011,449 (2,063,491) 34,142,583

Year 3 34,142,583 682,852 2,048,555 (2,145,143) 34,728,847

Year 4 34,728,847 694,577 2,083,731 (2,212,623) 35,294,532

Year 5 35,294,532 705,891 2,117,672 (2,270,239) 35,847,855

Year 6 35,847,855 716,957 2,150,871 (2,321,032) 36,394,652

Year 7 36,394,652 727,893 2,183,679 (2,367,154) 36,939,070

Year 8 36,939,070 738,781 2,216,344 (2,410,124) 37,484,072

Year 9 37,484,072 749,681 2,249,044 (2,451,017) 38,031,781

Year 10 38,031,781 760,636 2,281,907 (2,490,595) 38,583,729

Year 11 38,583,729 771,675 2,315,024 (2,529,397) 39,141,030

Year 12 39,141,030 782,821 2,348,462 (2,567,806) 39,704,506

Year 13 39,704,506 794,090 2,382,270 (2,606,096) 40,274,771

Year 14 40,274,771 805,495 2,416,486 (2,644,461) 40,852,291

Year 15 40,852,291 817,046 2,451,137 (2,683,041) 41,437,432

6

Schedule 4

Leverage Family

Hypothetical Integrated Income and Estate Tax Plan With a Partnership; Bequeaths Remaining Estate to Family

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is

likely to achieve the results shown.

Assumptions: FLP

Lenny Leverage Rate of Return Taxed at Ordinary Rates 2.00%

Rate of Return Taxed at Ordinary Rates 2.00% Rate of Return Taxed at Capital Gains Rates 6.00% Rate

of Return Taxed at Capital Gains Rates 6.00% Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Long-Term

Capital Gain Tax Rate 15.00% Lenny Leverage Percentage Ownership in Leverage FLP 8.70% Ordinary Tax Rate

35.00% GRAT Percentage Ownership in Leverage FLP 91.30% Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

GRAT Annuity* (20% Increasing Annuity) 146,297

Consumption (increasing at 3% per year) 100,000 Leverage FLP Valuation Discount 30.00%

Intra-Family Note Interest Percentage 2.06%

7520 Rate 2.40%

*based on nominal amount of $21,000,000 [$30,000,000 (1-30%)]

GRAT

Undiscounted Beg.

Distribution from

Cash Portion of Annuity

Partnership Share

Portion of Annuity

Percentage

Ownership of FLP

Undiscounted by GRAT At End of

Percentage

Ownership of

FLP by Lenny

Leverage At End

of Year Value Income Growth Partnership Payment Payment (Pre-discount) End of Year Value Year of Year

Year 1

30,000,000

-

-

1,791,000

(146,297)

- 32,253,703

91.30%

8.70%

Year 2 32,253,703 32,894 98,682 1,884,057 (175,556) - 34,658,443 91.30% 8.70%

Year 3 34,658,443 69,696 209,087 1,958,609 (210,668) - 37,220,451 91.30% 8.70%

Year 4 37,220,451 110,230 330,690 2,020,221 (252,801) - 39,945,285 91.30% 8.70%

Year 5 39,945,285 154,397 463,191 2,072,827 (303,361) - 42,837,547 91.30% 8.70%

Year 6 42,837,547 202,138 606,414 2,119,203 (364,034) - 45,900,517 91.30% 8.70%

Year 7 45,900,517 253,412 760,237 2,161,314 (436,841) - 49,135,718 91.30% 8.70%

Year 8 49,135,718 308,175 924,524 2,200,548 (524,209) - 52,542,366 91.30% 8.70%

Year 9 52,542,366 366,356 1,099,067 2,237,885 (629,050) - 56,116,705 91.30% 8.70%

Year 10 56,116,705 427,841 1,283,522 2,274,021 (754,860) - 59,851,181 91.30% 8.70%

Year 11 59,851,181 492,451 1,477,354 2,309,449 (905,832) - 63,733,444 91.30% 8.70%

Year 12 63,733,444 559,920 1,679,759 2,344,519 (1,086,999) - 67,745,120 91.30% 8.70%

Year 13 67,745,120 629,864 1,889,591 2,379,479 (1,304,399) - 71,860,331 91.30% 8.70%

Year 14 71,860,331 701,754 2,105,263 2,414,508 (1,565,278) - 76,043,879 91.30% 8.70%

Year 15 76,043,879 774,879 2,324,638 2,449,733 (1,878,334) - 80,249,055 91.30% 8.70%

Year 16 80,249,055 1,604,981 4,814,943 - (2,254,001) - 84,414,978 - -

Year 17 84,414,978 1,688,300 5,064,899 - (2,704,801) - 88,463,375 - -

Year 18 88,463,375 1,769,268 5,307,803 - (3,245,761) - 92,294,684 - -

Year 19 92,294,684 1,845,894 5,537,681 - (3,894,914) - 95,783,345 - -

Year 20 95,783,345 1,915,667 5,747,001 - (4,673,897) - 98,772,116 - -

7

Schedule 4

Leverage Family

Hypothetical Integrated Income and Estate Tax Plan With a Partnership; Bequeaths Remaining Estate to Family

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is

likely to achieve the results shown.

Assumptions: FLP

Lenny Leverage Rate of Return Taxed at Ordinary Rates 2.00%

Rate of Return Taxed at Ordinary Rates 2.00% Rate of Return Taxed at Capital Gains Rates 6.00% Rate

of Return Taxed at Capital Gains Rates 6.00% Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Long-Term

Capital Gain Tax Rate 15.00% Lenny Leverage Percentage Ownership in Leverage FLP 8.70% Ordinary Tax Rate

35.00% GRAT Percentage Ownership in Leverage FLP 91.30% Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

GRAT Annuity* (20% Increasing Annuity) 146,297

Consumption (increasing at 3% per year) 100,000 Leverage FLP Valuation Discount 30.00%

Intra-Family Note Interest Percentage 2.06%

7520 Rate 2.40%

*based on nominal amount of $21,000,000 [$30,000,000 (1-30%)]

Lenny Leverage

Distribution from

Beginning of Year* Income Growth Partnership Cash Annuity Payment Income Taxes Consumption End of Year

Year 1

1,500,000

30,000

90,000

170,571

146,297

(333,264)

(100,000)

1,503,604

Year 2 1,503,604 30,072 90,216 179,434 175,556 (420,658) (103,000) 1,455,225

Year 3 1,455,225 29,105 87,314 186,534 210,668 (493,867) (106,090) 1,368,888

Year 4 1,368,888 27,378 82,133 192,402 252,801 (557,812) (109,273) 1,256,519

Year 5 1,256,519 25,130 75,391 197,412 303,361 (616,010) (112,551) 1,129,252

Year 6 1,129,252 22,585 67,755 201,829 364,034 (670,995) (115,927) 998,533

Year 7 998,533 19,971 59,912 205,839 436,841 (724,604) (119,405) 877,087

Year 8 877,087 17,542 52,625 209,576 524,209 (778,191) (122,987) 779,859

Year 9 779,859 15,597 46,792 213,132 629,050 (832,775) (126,677) 724,979

Year 10 724,979 14,500 43,499 216,573 754,860 (889,135) (130,477) 734,798

Year 11 734,798 14,696 44,088 219,948 905,832 (947,894) (134,392) 837,077

Year 12 837,077 16,742 50,225 223,288 1,086,999 (1,009,563) (138,423) 1,066,343

Year 13 1,066,343 21,327 63,981 226,617 1,304,399 (1,074,582) (142,576) 1,465,508

Year 14 1,465,508 29,310 87,930 229,953 1,565,278 (1,143,345) (146,853) 2,087,781

Year 15 2,087,781 41,756 125,267 233,308 1,878,334 (1,216,220) (151,259) 2,998,967

Year 16 2,998,967 59,979 179,938 - 2,254,001 (1,258,608) (155,797) 4,078,481

Year 17 4,078,481 81,570 244,709 - 2,704,801 (1,331,497) (160,471) 5,617,593

Year 18 5,617,593 112,352 337,056 - 3,245,761 (1,411,015) (165,285) 7,736,462

Year 19 7,736,462 154,729 464,188 - 3,894,914 (1,497,016) (170,243) 10,583,034

Year 20 10,583,034 211,661 634,982 - 4,673,897 (3,349,006) (175,351) 12,579,217

* Assumes $2.86 million of LP interests is paid from Leverage GST Trust for purchase of remainder interest

8

Schedule 4

Leverage Family

Hypothetical Integrated Income and Estate Tax Plan With a Partnership; Bequeaths Remaining Estate to Family

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is

likely to achieve the results shown.

Assumptions: FLP

Lenny Leverage Rate of Return Taxed at Ordinary Rates 2.00%

Rate of Return Taxed at Ordinary Rates 2.00% Rate of Return Taxed at Capital Gains Rates 6.00% Rate

of Return Taxed at Capital Gains Rates 6.00% Turnover Rate (% of Capital Gains Recognized/Year) 30.00% Long-Term

Capital Gain Tax Rate 15.00% Lenny Leverage Percentage Ownership in Leverage FLP 8.70% Ordinary Tax Rate

35.00% GRAT Percentage Ownership in Leverage FLP 91.30% Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

GRAT Annuity* (20% Increasing Annuity) 146,297

Consumption (increasing at 3% per year) 100,000 Leverage FLP Valuation Discount 30.00%

Intra-Family Note Interest Percentage 2.06%

7520 Rate 2.40%

*based on nominal amount of $21,000,000 [$30,000,000 (1-30%)]

Leverage GST Trust

Beginning of Year Income Growth

Remainder Interest

from GRAT Income Taxes End of Year

Year 1 - - - - - -

Year 2 - - - - - -

Year 3 - - - - - -

Year 4 - - - - - -

Year 5 - - - - - -

Year 6 - - - - - -

Year 7 - - - - - -

Year 8 - - - - - -

Year 9 - - - - - -

Year 10 - - - - - -

Year 11 - - - - - -

Year 12 - - - - - -

Year 13 - - - - - -

Year 14 - - - - - -

Year 15 - - - - - -

Year 16 - - - - - -

Year 17 - - - - - -

Year 18 - - - - - -

Year 19 - - - - - -

Year 20 - - - 98,772,116 - 98,772,116

1

Pre-Death

Post-Death

Present Value

(Discounted

at 3%)

Percentage

of Total

No Further Planning; Bequeaths Estate to Family

100,513,787 - - 0.00%

- 55,282,583 30,608,626 34.52%

13,317,021 13,317,021 7,373,312 8.32%

2,687,037 2,687,037 1,487,747 1.68%

3,022,654 3,022,654 1,673,570 1.89%

20,916,430 20,916,430 11,580,920 13.06%

19,680,241 19,680,241 10,896,472 12.29%

- 45,231,204 25,043,421 28.25%

$160,137,171 $160,137,171 $88,664,069 100.00%

Hypothetical Integrated Income and Estate Tax Plan With a Partnership; Bequeaths Remaining Estate to Family

34,976,018 - - 0.00%

- 19,236,810 10,650,955 12.01%

81,703,110 81,703,110 45,237,031 51.02%

2,687,037 2,687,037 1,487,747 1.68%

3,022,654 3,022,654 1,673,570 1.89%

20,485,173 20,485,173 11,342,144 12.79%

17,263,179 17,263,179 9,558,204 10.78%

- 15,739,208 8,714,418 9.83%

$160,137,171 $160,137,171 $88,664,069 100.00%

Schedule 4a

Leverage Family

Hypothetical Integrated Income and Estate Tax Plan Comparisons - Shorter of Lenny Leverage's Death or 20 Years Scenario

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These

examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Lenny Leverage

Leverage Children

Leverage GST Trust

Consumption - Direct Cost

Consumption - Investment Opportunity Cost

IRS - Income Tax

IRS - Investment Opportunity Costs

IRS - Estate Tax (at 45%)

Total

Lenny Leverage

Leverage Children

Leverage GST Trust

Consumption - Direct Cost

Consumption - Investment Opportunity Cost

IRS - Income Tax

IRS - Investment Opportunity Costs

IRS - Estate Tax (at 45%)

Total

2

Schedule 4a

Leverage Family

Asset Page*

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown

herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Lenny

Leverage

FLP

Asset: Miscellaneous Investments

$30,000,000 Basis: Miscellaneous Investments $30,000,000

GST Trust

Asset: Cash

$2,857,143

Basis: Cash $2,857,143

Other Miscellaneous Assets

Asset: Cash

$1,500,000

Basis: Cash $1,500,000

Total Assets*

$34,357,143

Total Basis $34,357,143

* There is not any proposed planning for Lenny Leverage's other assets

3

Schedule 4a

Leverage Family

No Further Planning; Bequeaths Estate to Family

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes

only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Rate of Return Taxed at Ordinary Rates

2.00%

Rate of Return Taxed at Capital Gains Rates 6.00%

Long-Term Capital Gain Tax Rate 18.25%

Ordinary Tax Rate 38.25%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Consumption (with 3% inflation adjustment each year) 100,000

Lenny Leverage

Beg. of Year Income Growth Income Taxes Consumption End of Year

Year 1

31,500,000

630,000

1,890,000

(375,695)

(100,000)

33,544,305

Year 2 33,544,305 670,886 2,012,658 (479,554) (103,000) 35,645,296

Year 3 35,645,296 712,906 2,138,718 (565,757) (106,090) 37,825,072

Year 4 37,825,072 756,501 2,269,504 (640,277) (109,273) 40,101,528

Year 5 40,101,528 802,031 2,406,092 (707,383) (112,551) 42,489,716

Year 6 42,489,716 849,794 2,549,383 (770,140) (115,927) 45,002,826

Year 7 45,002,826 900,057 2,700,170 (830,769) (119,405) 47,652,878

Year 8 47,652,878 953,058 2,859,173 (890,898) (122,987) 50,451,223

Year 9 50,451,223 1,009,024 3,027,073 (951,739) (126,677) 53,408,905

Year 10 53,408,905 1,068,178 3,204,534 (1,014,212) (130,477) 56,536,928

Year 11 56,536,928 1,130,739 3,392,216 (1,079,042) (134,392) 59,846,449

Year 12 59,846,449 1,196,929 3,590,787 (1,146,810) (138,423) 63,348,931

Year 13 63,348,931 1,266,979 3,800,936 (1,218,011) (142,576) 67,056,258

Year 14 67,056,258 1,341,125 4,023,376 (1,293,075) (146,853) 70,980,831

Year 15 70,980,831 1,419,617 4,258,850 (1,372,398) (151,259) 75,135,641

Year 16 75,135,641 1,502,713 4,508,138 (1,456,353) (155,797) 79,534,342

Year 17 79,534,342 1,590,687 4,772,061 (1,545,306) (160,471) 84,191,313

Year 18 84,191,313 1,683,826 5,051,479 (1,639,622) (165,285) 89,121,712

Year 19 89,121,712 1,782,434 5,347,303 (1,739,674) (170,243) 94,341,532

Year 20 94,341,532 1,886,831 5,660,492 (1,199,716) (175,351) 100,513,787

4

Schedule 4a

Leverage Family

No Further Planning; Bequeaths Estate to Family

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes

only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions: 2.00%

6.00%

18.25%

38.25%

30.00%

100,000

Rate of Return Taxed at Ordinary Rates Rate of Return Taxed at Capital Gains Rates

Long-Term Capital Gain Tax Rate

Ordinary Tax Rate

Turnover Rate (% of Capital Gains Recognized/Year)

Consumption (with 3% inflation adjustment each year)

Leverage GST Trust

Beg. of Year Income Growth Income Taxes End of Year

5

Schedule 4a

Leverage Family

Hypothetical Integrated Income and Estate Tax Plan With a Partnership; Bequeaths Remaining Estate to Family

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown

herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions: FLP Lenny Leverage Rate of Return Taxed at Ordinary Rates 2.00%

Rate of Return Taxed at Ordinary Rates 2.00% Rate of Return Taxed at Capital Gains Rates 6.00%

Rate of Return Taxed at Capital Gains Rates 6.00% Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain Tax Rate 15.00% Lenny Leverage Percentage Ownership in Leverage FLP 8.70%

Ordinary Tax Rate 35.00% GRAT Percentage Ownership in Leverage FLP 91.30%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annuity* (20% Increasing Annuity) 207,119 *based on nominal amount of $21,000,000 [$30,000,000 (1-30%)]

Consumption (increasing at 3% per year) 100,000 Leverage FLP Valuation Discount 30.00%

Intra-Family Note Interest Percentage 2.06% 7520 Rate 2.40%

Leverage FLP

Beginning of Year

Income

Growth

Distributions

End of Year

Year 1

32,857,143

657,143

1,971,429

(1,961,571)

33,524,143

Year 2 33,524,143 670,483 2,011,449 (2,063,491) 34,142,583

Year 3 34,142,583 682,852 2,048,555 (2,145,143) 34,728,847

Year 4 34,728,847 694,577 2,083,731 (2,212,623) 35,294,532

Year 5 35,294,532 705,891 2,117,672 (2,270,239) 35,847,855

Year 6 35,847,855 716,957 2,150,871 (2,321,032) 36,394,652

Year 7 36,394,652 727,893 2,183,679 (2,367,154) 36,939,070

Year 8 36,939,070 738,781 2,216,344 (2,410,124) 37,484,072

Year 9 37,484,072 749,681 2,249,044 (2,451,017) 38,031,781

Year 10 38,031,781 760,636 2,281,907 (2,490,595) 38,583,729

Year 11 38,583,729 771,675 2,315,024 (2,529,397) 39,141,030

Year 12 39,141,030 782,821 2,348,462 (2,567,806) 39,704,506

Year 13 39,704,506 794,090 2,382,270 (2,606,096) 40,274,771

Year 14 40,274,771 805,495 2,416,486 (2,644,461) 40,852,291

Year 15 40,852,291 817,046 2,451,137 (2,683,041) 41,437,432

6

Schedule 4a

Leverage Family

Hypothetical Integrated Income and Estate Tax Plan With a Partnership; Bequeaths Remaining Estate to Family

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown

herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions: FLP Lenny Leverage Rate of Return Taxed at Ordinary Rates 2.00%

Rate of Return Taxed at Ordinary Rates 2.00% Rate of Return Taxed at Capital Gains Rates 6.00%

Rate of Return Taxed at Capital Gains Rates 6.00% Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain Tax Rate 15.00% Lenny Leverage Percentage Ownership in Leverage FLP 8.70%

Ordinary Tax Rate 35.00% GRAT Percentage Ownership in Leverage FLP 91.30%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annuity* (20% Increasing Annuity) 207,119 *based on nominal amount of $21,000,000 [$30,000,000 (1-30%)]

Consumption (increasing at 3% per year) 100,000 Leverage FLP Valuation Discount 30.00%

Intra-Family Note Interest Percentage 2.06% 7520 Rate 2.40%

GRAT

Undiscounted Beg.

of Year Value

Income

Growth

Distribution from

Partnership

Cash Portion of

Annuity Payment

Partnership

Share Portion of

Annuity Payment

(Pre-discount)

Undiscounted

End of Year

Value

Percentage

Ownership of FLP

by GRAT At End

of Year

Percentage

Ownership of

FLP by Lenny

Leverage At End

of Year

Year 1

30,000,000

-

-

1,791,000

(207,119)

- 32,192,881

91.30%

8.70%

Year 2 32,192,881 31,678 95,033 1,884,057 (248,543) - 34,519,769 91.30% 8.70%

Year 3 34,519,769 66,922 200,766 1,958,609 (298,251) - 36,983,099 91.30% 8.70%

Year 4 36,983,099 105,483 316,449 2,020,221 (357,902) - 39,583,845 91.30% 8.70%

Year 5 39,583,845 147,168 441,504 2,072,827 (429,482) - 42,321,071 91.30% 8.70%

Year 6 42,321,071 191,808 575,425 2,119,203 (515,378) - 45,191,378 91.30% 8.70%

Year 7 45,191,378 239,230 717,689 2,161,314 (618,454) - 48,188,234 91.30% 8.70%

Year 8 48,188,234 289,225 867,675 2,200,548 (742,145) - 51,301,148 91.30% 8.70%

Year 9 51,301,148 341,531 1,024,594 2,237,885 (890,574) - 54,514,666 91.30% 8.70%

Year 10 54,514,666 395,800 1,187,400 2,274,021 (1,068,689) - 57,807,151 91.30% 8.70%

Year 11 57,807,151 451,571 1,354,712 2,309,449 (1,282,426) - 61,149,297 91.30% 8.70%

Year 12 61,149,297 508,237 1,524,710 2,344,519 (1,538,912) - 64,502,329 91.30% 8.70%

Year 13 64,502,329 565,008 1,695,023 2,379,479 (1,846,694) - 67,815,822 91.30% 8.70%

Year 14 67,815,822 620,864 1,862,592 2,414,508 (2,216,033) - 71,025,055 91.30% 8.70%

Year 15 71,025,055 674,503 2,023,508 2,449,733 (2,659,239) - 74,047,820 91.30% 8.70%

Year 16 74,047,820 1,480,956 4,442,869 - (3,191,087) - 76,780,559 - -

Year 17 76,780,559 1,535,611 4,606,834 - (3,829,304) - 79,093,699 - -

Year 18 79,093,699 1,581,874 4,745,622 - (4,595,165) - 80,826,030 - -

Year 19 80,826,030 1,616,521 4,849,562 - (5,514,198) - 81,777,914 - -

Year 20 81,777,914 1,635,558 4,906,675 - (6,617,038) - 81,703,110 - -

7

Schedule 4a

Leverage Family

Hypothetical Integrated Income and Estate Tax Plan With a Partnership; Bequeaths Remaining Estate to Family

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown

herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions: FLP Lenny Leverage Rate of Return Taxed at Ordinary Rates 2.00%

Rate of Return Taxed at Ordinary Rates 2.00% Rate of Return Taxed at Capital Gains Rates 6.00%

Rate of Return Taxed at Capital Gains Rates 6.00% Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain Tax Rate 15.00% Lenny Leverage Percentage Ownership in Leverage FLP 8.70%

Ordinary Tax Rate 35.00% GRAT Percentage Ownership in Leverage FLP 91.30%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annuity* (20% Increasing Annuity) 207,119 *based on nominal amount of $21,000,000 [$30,000,000 (1-30%)]

Consumption (increasing at 3% per year) 100,000 Leverage FLP Valuation Discount 30.00%

Intra-Family Note Interest Percentage 2.06% 7520 Rate 2.40%

Lenny Leverage

Beginning of Year*

Income

Growth

Distribution from

Partnership

Cash Annuity

Payment

Income Taxes

Consumption

End of Year

Year 1

1,500,000

30,000

90,000

170,571

207,119

(333,264)

(100,000)

1,564,426

Year 2 1,564,426 31,289 93,866 179,434 248,543 (420,658) (103,000) 1,593,899

Year 3 1,593,899 31,878 95,634 186,534 298,251 (493,867) (106,090) 1,606,240

Year 4 1,606,240 32,125 96,374 192,402 357,902 (557,812) (109,273) 1,617,959

Year 5 1,617,959 32,359 97,078 197,412 429,482 (616,010) (112,551) 1,645,728

Year 6 1,645,728 32,915 98,744 201,829 515,378 (670,995) (115,927) 1,707,672

Year 7 1,707,672 34,153 102,460 205,839 618,454 (724,604) (119,405) 1,824,570

Year 8 1,824,570 36,491 109,474 209,576 742,145 (778,191) (122,987) 2,021,078

Year 9 2,021,078 40,422 121,265 213,132 890,574 (832,775) (126,677) 2,327,018

Year 10 2,327,018 46,540 139,621 216,573 1,068,689 (889,135) (130,477) 2,778,829

Year 11 2,778,829 55,577 166,730 219,948 1,282,426 (947,894) (134,392) 3,421,223

Year 12 3,421,223 68,424 205,273 223,288 1,538,912 (1,009,563) (138,423) 4,309,134

Year 13 4,309,134 86,183 258,548 226,617 1,846,694 (1,074,582) (142,576) 5,510,017

Year 14 5,510,017 110,200 330,601 229,953 2,216,033 (1,143,345) (146,853) 7,106,605

Year 15 7,106,605 142,132 426,396 233,308 2,659,239 (1,216,220) (151,259) 9,200,202

Year 16 12,803,457 256,069 768,207 - 3,191,087 (1,293,559) (155,797) 15,569,465

Year 17 15,569,465 311,389 934,168 - 3,829,304 (1,375,716) (160,471) 19,108,140

Year 18 19,108,140 382,163 1,146,488 - 4,595,165 (1,463,044) (165,285) 23,603,628

Year 19 23,603,628 472,073 1,416,218 - 5,514,198 (1,555,909) (170,243) 29,279,964

Year 20 29,279,964 585,599 1,756,798 - 6,617,038 (3,088,030) (175,351) 34,976,018

* Assumes $2.86 million of LP interests is paid from Leverage GST Trust for purchase of remainder interest

8

Schedule 4a

Leverage Family

Hypothetical Integrated Income and Estate Tax Plan With a Partnership; Bequeaths Remaining Estate to Family

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown

herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions: FLP Lenny Leverage Rate of Return Taxed at Ordinary Rates 2.00%

Rate of Return Taxed at Ordinary Rates 2.00% Rate of Return Taxed at Capital Gains Rates 6.00%

Rate of Return Taxed at Capital Gains Rates 6.00% Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain Tax Rate 15.00% Lenny Leverage Percentage Ownership in Leverage FLP 8.70%

Ordinary Tax Rate 35.00% GRAT Percentage Ownership in Leverage FLP 91.30%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Annuity* (20% Increasing Annuity) 207,119 *based on nominal amount of $21,000,000 [$30,000,000 (1-30%)]

Consumption (increasing at 3% per year) 100,000 Leverage FLP Valuation Discount 30.00%

Intra-Family Note Interest Percentage 2.06% 7520 Rate 2.40%

Leverage GST Trust

Beginning of Year Income Growth

Remainder Interest

from GRAT Income Taxes End of Year

Year 1 - - - - - -

Year 2 - - - - - -

Year 3 - - - - - -

Year 4 - - - - - -

Year 5 - - - - - -

Year 6 - - - - - -

Year 7 - - - - - -

Year 8 - - - - - -

Year 9 - - - - - -

Year 10 - - - - - -

Year 11 - - - - - -

Year 12 - - - - - -

Year 13 - - - - - -

Year 14 - - - - - -

Year 15 - - - - - -

Year 16 - - - - - -

Year 17 - - - - - -

Year 18 - - - - - -

Year 19 - - - - - -

Year 20 - - - 81,703,110 - 81,703,110

Schedule 5

Carrier Family

Hypothetical Integrated Income and Estate Tax Plan Comparisons This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

Goldman Sachs does not provide legal, tax, or accounting advice to its clients and all investors are strongly urged to consult with their own advisors regarding any potential strategy or investment. Tax

results may differ depending on a client’s individual positions, elections or other circumstances. This material is intended for educational purposes only. While it is based on information believed to be

reliable, no representation or warranty is given as to its accuracy or completeness and it should not be relied upon as such.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These

examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

The assumed growth rate(s) stated herein are provided purely for illustrative purposes only and do not represent a guarantee that these amounts can be achieved. Assumed growth rates are subject to high

levels of uncertainty and do not represent actual trading and, thus, may not reflect material economic and market factors that may have an impact on actual performance. Goldman Sachs has no obligation to

provide updates to these rates.

No Further Planning; Transfers Estate to Family at the End of 8 Years

Pre-

Death

Post

Death

Percentage

of Total

Iam A. Carrier 25,622,807 - 0.00%

Carrier Family - 14,092,544 47.86%

IRS - Income Tax 3,755,759 3,755,759 12.75%

IRS - Investment Opportunity Costs 68,598 68,598 0.23%

IRS - Estate Tax (at 45%) - 11,530,263 39.16%

Total $29,447,164 $29,447,164 100.00%

Planning Scenario #1: Leveraged FLLC Asset GRAT Technique That Includes Carried Interests, Cash

and the Investment Interests in the Private Equity Fund

Iam A. Carrier 1,606,183 - 0.00%

Carrier Family 24,003,226 24,886,627 84.51%

IRS - Income Tax 3,769,157 3,769,157 12.80%

IRS - Investment Opportunity Costs 68,598 68,598 0.23%

IRS - Estate Tax (at 45%) - 722,783 2.45%

Total $29,447,164 $29,447,164 100.00%

*Planning Scenario #2: Leveraged FLLC Asset GRAT Technique That Includes Only the Carried

Interest and Cash

Iam A. Carrier 3,186,821 - 0.00%

Carrier Family 22,694,516 24,447,268 83.02%

IRS - Income Tax 3,497,229 3,497,229 11.88%

IRS - Investment Opportunity Costs 68,598 68,598 0.23%

IRS - Estate Tax (at 45%) - 1,434,069 4.87%

Total $29,447,164 $29,447,164 100.00% * May be subject to IRS Section 2701 valuation considerations

1

Schedule 5

Carrier Family

Asset Page

This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

Goldman Sachs does not provide legal, tax, or accounting advice to its clients and all investors are strongly urged to consult with their own advisors regarding any potential strategy or investment. Tax results

may differ depending on a client’s individual positions, elections or other circumstances. This material is intended for educational purposes only. While it is based on information believed to be reliable, no

representation or warranty is given as to its accuracy or completeness and it should not be relied upon as such.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples

are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

The assumed growth rate(s) stated herein are provided purely for illustrative purposes only and do not represent a guarantee that these amounts can be achieved. Assumed growth rates are subject to high levels

of uncertainty and do not represent actual trading and, thus, may not reflect material economic and market factors that may have an impact on actual performance. Goldman Sachs has no obligation to provide

updates to these rates.

Iam A. Carrier

FMV: Carried Interest*

$1,500,000

Basis: Carried Interest $0

FMV: Private Equity Investment**

$2,000,000

Basis: Private Equity Investment $2,000,000

Asset: Cash

$1,000,000

Basis: Cash $1,000,000

Total Assets*** $4,500,000

Total Basis $3,000,000

* $1,500,000 represents 10% of the fund's total carried interest

** $2,000,000 represents 0.20% of the funds total initial investment interests

*** There is no proposed planning for Iam A. Carrier's other assets

**** Private Equity's hypothetical growth performance is detailed below. Profits are distributed as follows: first, to the investment interest parties until all capital

contributions have been returned; second, to the investment interest parties until they have received an 8% cumulative annual compounded return on

unreturned capital contribution amounts; third, to the carried interest portion until the carried interest has received distributions totaling 20% of the total profits

of the private equity fund on a cumulative basis; fourth, the residual profits and cash flow will pass 20% to the carried interest portions and 80% to the

investment interest portions.

Private Equity Fund****

Beginning

of Year

Distributed

Income

Unrealized

Growth* End of Year

Year 1

1,000,000,000

20,000,000

101,353,392

1,101,353,392

Year 2 1,101,353,392 22,027,068 111,625,902 1,212,979,294

Year 3 1,212,979,294 24,259,586 122,939,566 1,335,918,860

Year 4 1,335,918,860 26,718,377 135,399,908 1,471,318,768

Year 5 1,471,318,768 29,426,375 149,123,148 1,620,441,915

Year 6 1,620,441,915 32,408,838 164,237,285 1,784,679,200

Year 7 1,784,679,200 35,693,584 180,883,290 1,965,562,490

Year 8 1,965,562,490 39,311,250 199,216,425 2,164,778,916

* Realized at the end of the 8th year 2

Schedule 5

Carrier Family

No Further Planning; Transfers Estate to Family at the End of 8 Years This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

Goldman Sachs does not provide legal, tax, or accounting advice to its clients and all investors are strongly urged to consult with their own advisors regarding any potential strategy or investment. Tax results may differ depending on a client’s

individual positions, elections or other circumstances. This material is intended for educational purposes only. While it is based on information believed to be reliable, no representation or warranty is given as to its accuracy or completeness and it

should not be relied upon as such.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

The assumed growth rate(s) stated herein are provided purely for illustrative purposes only and do not represent a guarantee that these amounts can be achieved. Assumed growth rates are subject to high levels of uncertainty and do not represent

actual trading and, thus, may not reflect material economic and market factors that may have an impact on actual performance. Goldman Sachs has no obligation to provide updates to these rates.

Assumptions (Iam A. Carrier): Rate of Return Taxed at Ordinary Rates - Non-Private Equity Assets 2.00%

Rate of Return Taxed at Capital Gains Rates - Non-Private Equity Assets 5.00%

Long-Term Capital Gain Tax Rate 15.00%

Ordinary Tax Rate 35.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Iam A. Carrier

Beginning

of Year - Cash

Income

Growth

Distributed

Income from

Private Equity

Investment

Realized

Growth of

Private Equity

Investment

Realized

Growth of

Carried

Interest

Income

Taxes

End

of Year -

Cash

Private Equity

Investment

Interest

End

of Year -

Total Assets

Year 1

1,000,000

20,000

50,000

40,000

-

-

(23,250)

1,086,750

2,000,000

3,086,750

Year 2 1,086,750 21,735 54,338 44,054 - - (27,046) 1,179,830 2,000,000 3,179,830

Year 3 1,179,830 23,597 58,992 48,519 - - (30,709) 1,280,228 2,000,000 3,280,228

Year 4 1,280,228 25,605 64,011 53,437 - - (34,373) 1,388,908 2,000,000 3,388,908

Year 5 1,388,908 27,778 69,445 58,853 - - (38,142) 1,506,842 2,000,000 3,506,842

Year 6 1,506,842 30,137 75,342 64,818 - - (42,099) 1,635,040 2,000,000 3,635,040

Year 7 1,635,040 32,701 81,752 71,387 - - (46,315) 1,774,564 2,000,000 3,774,564

Year 8 1,774,564 35,491 88,728 78,622 1,863,646 23,295,578 (3,513,824) 23,622,807 2,000,000 25,622,807

* Assumes Private Equity growth profits are realized year 8

3

4

Beginning

of Year

Interest

Note

Payment

End of Year

Year 1

1,000,000

26,400

(26,400)

1,000,000

Year 2 1,000,000 26,400 (26,400) 1,000,000

Year 3 1,000,000 26,400 (26,400) 1,000,000

Year 4 1,000,000 26,400 (26,400) 1,000,000

Year 5 1,000,000 26,400 (26,400) 1,000,000

Year 6 1,000,000 26,400 (26,400) 1,000,000

Year 7 1,000,000 26,400 (26,400) 1,000,000

Year 8 1,000,000 26,400 (1,026,400) -

Assumptions (Iam A. Carrier): Assumptions (Holdco FLLC): Rate of Return Taxed at Ordinary Rates - Non-Private Equity Assets 2.00% Rate of Return Taxed at Ordinary Rates - Non-Private Equity Assets 2.00%

Rate of Return Taxed at Capital Gains Rates - Non-Private Equity Assets 5.00% Rate of Return Taxed at Capital Gains Rates - Non-Private Equity Assets 5.00%

Long-Term Capital Gain Tax Rate 15.00% Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Ordinary Tax Rate 35.00% Iam A. Carrier's Percentage Ownership in Carrier FLLC 1.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Ownership in Carrier FLLC 99.00%

Intra-Family Note from Holdco to Iam Carrier Interest Percentage 2.64% Holdco FLLC Valuation Discount 35.00%

7520 Rate 3.20% Holdco FLLC

Schedule 5

Carrier Family

Planning Scenario #1: Leveraged FLLC Asset GRAT Technique That Includes Carried Interests, Cash and the Investment Interests in the Private Equity Fund This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

Goldman Sachs does not provide legal, tax, or accounting advice to its clients and all investors are strongly urged to consult with their own advisors regarding any potential strategy or investment. Tax results may differ depending on a client’s individual positions, elections

or other circumstances. This material is intended for educational purposes only. While it is based on information believed to be reliable, no representation or warranty is given as to its accuracy or completeness and it should not be relied upon as such.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

The assumed growth rate(s) stated herein are provided purely for illustrative purposes only and do not represent a guarantee that these amounts can be achieved. Assumed growth rates are subject to high levels of uncertainty and do not represent actual trading and, thus,

may not reflect material economic and market factors that may have an impact on actual performance. Goldman Sachs has no obligation to provide updates to these rates.

Beginning

of Year

Income

Growth

Distributed

Income from

Private Equity

Investment

Realized

Growth of

Private Equity

Investment

Realized

Growth of

Carried

Interest

Distributions

Note

Payments

End of Year

Private Equity

Investment

Interest

End of Year -

Total Assets

Year 1

1,000,000

20,000

50,000

40,000

-

-

(69,939)

(79,200)

960,861

2,000,000

2,960,861

Year 2 960,861 19,217 48,043 44,054 - - (83,927) (79,200) 909,048 2,000,000 2,909,048

Year 3 909,048 18,181 45,452 48,519 - - (100,713) (79,200) 841,287 2,000,000 2,841,287

Year 4 841,287 16,826 42,064 53,437 - - (120,855) (79,200) 753,559 2,000,000 2,753,559

Year 5 753,559 15,071 37,678 58,853 - - (145,026) (79,200) 640,935 2,000,000 2,640,935

Year 6 640,935 12,819 32,047 64,818 - - (174,032) (79,200) 497,386 2,000,000 2,497,386

Year 7 497,386 9,948 24,869 71,387 - - (208,838) (79,200) 315,552 2,000,000 2,315,552

Year 8 315,552 6,311 15,778 78,622 1,863,646 23,295,578 (250,605) (3,079,200) 22,245,683 2,000,000 24,245,683

* Assumes Private Equity growth profits are realized year 8

Iam A. Carrier

Beginning

of Year

Income

Growth

Distribution

from FLLC

Note

Payments

Annuity

Payments

Income

Taxes

End of Year

Year 1

-

-

-

699

79,200

69,240

(23,250)

125,889

Year 2 125,889 2,518 6,294 839 79,200 83,088 (27,046) 270,783

Year 3 270,783 5,416 13,539 1,007 79,200 99,706 (30,709) 438,941

Year 4 438,941 8,779 21,947 1,209 79,200 119,647 (34,373) 635,349

Year 5 635,349 12,707 31,767 1,450 79,200 143,576 (38,142) 865,908

Year 6 865,908 17,318 43,295 1,740 79,200 172,291 (42,099) 1,137,654

Year 7 1,137,654 22,753 56,883 2,088 79,200 206,750 (46,315) 1,459,012

Year 8 1,459,012 29,180 72,951 2,506 3,079,200 248,099 (3,527,222) 1,363,727

Carrier GRAT

Beginning

of Year

Income

Growth

Distribution

from FLLC

Annuity

Payments

Income

Taxes

End of Year

Year 1

-

-

-

69,240

(69,240)

-

-

Year 2 - - - 83,088 (83,088) - -

Year 3 - - - 99,706 (99,706) - -

Year 4 - - - 119,647 (119,647) - -

Year 5 - - - 143,576 (143,576) - -

Year 6 - - - 172,291 (172,291) - -

Year 7 - - - 206,750 (206,750) - -

Year 8 - - - 248,099 (248,099) - -

Note #1 Between Iam A. Carrier and Holdco FLLC for the Purchase of Private Equity Fund Interests Note #2 Between Iam A. Carrier and Holdco FLLC for the Purchase of Financial Assets

Beginning

of Year

Interest

Note

Payment

End of Year

Year 1

2,000,000

52,800

(52,800)

2,000,000

Year 2 2,000,000 52,800 (52,800) 2,000,000

Year 3 2,000,000 52,800 (52,800) 2,000,000

Year 4 2,000,000 52,800 (52,800) 2,000,000

Year 5 2,000,000 52,800 (52,800) 2,000,000

Year 6 2,000,000 52,800 (52,800) 2,000,000

Year 7 2,000,000 52,800 (52,800) 2,000,000

Year 8 2,000,000 52,800 (2,052,800) -

5

Assumptions (Iam A. Carrier): Assumptions (Holdco FLLC): Rate of Return Taxed at Ordinary Rates - Non-Private Equity Assets 2.00% Rate of Return Taxed at Ordinary Rates - Non-Private Equity Assets 2.00%

Rate of Return Taxed at Capital Gains Rates - Non-Private Equity Assets 5.00% Rate of Return Taxed at Capital Gains Rates - Non-Private Equity Assets 5.00%

Long-Term Capital Gain Tax Rate 15.00% Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Ordinary Tax Rate 35.00% Iam A. Carrier's Percentage Ownership in Carrier FLLC 1.00%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00% GRAT Ownership in Carrier FLLC 99.00%

Intra-Family Note Interest Percentage 2.64% Holdco FLLC Valuation Discount 35.00%

7520 Rate 3.20% Holdco FLLC

Schedule 5

Carrier Family

*Planning Scenario #2: Leveraged FLLC Asset GRAT Technique That Includes Only the Carried Interest and Cash This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

Goldman Sachs does not provide legal, tax, or accounting advice to its clients and all investors are strongly urged to consult with their own advisors regarding any potential strategy or investment. Tax results may differ depending on a client’s individual positions, elections

or other circumstances. This material is intended for educational purposes only. While it is based on information believed to be reliable, no representation or warranty is given as to its accuracy or completeness and it should not be relied upon as such.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

The assumed growth rate(s) stated herein are provided purely for illustrative purposes only and do not represent a guarantee that these amounts can be achieved. Assumed growth rates are subject to high levels of uncertainty and do not represent actual trading and, thus,

may not reflect material economic and market factors that may have an impact on actual performance. Goldman Sachs has no obligation to provide updates to these rates.

Beginning

of Year

Income

Growth

Distributed

Income from

Private Equity

Investment

Realized

Growth of

Carried

Interest

Note

Payments

Distributions

End of Year

Year 1

1,000,000

20,000

50,000

40,000

-

(26,400)

(69,939)

1,013,661

Year 2 1,013,661 20,273 50,683 44,054 - (26,400) (83,927) 1,018,344

Year 3 1,018,344 20,367 50,917 48,519 - (26,400) (100,713) 1,011,034

Year 4 1,011,034 20,221 50,552 53,437 - (26,400) (120,855) 987,988

Year 5 987,988 19,760 49,399 58,853 - (26,400) (145,026) 944,574

Year 6 944,574 18,891 47,229 64,818 - (26,400) (174,032) 875,080

Year 7 875,080 17,502 43,754 71,387 - (26,400) (208,838) 772,485

Year 8 772,485 15,450 38,624 78,622 23,295,578 (1,026,400) (250,605) 22,923,754

* Assumes Private Equity growth profits are realized year 8

Iam A. Carrier

Beginning

of Year

Income

Growth

Distribution

from FLLC

Note

Payments

Annuity

Payments

Realized

Growth of

Private Equity

Investment

Income

Taxes

End of Year

Private Equity

Investment

Interest

End of Year -

Total Assets

Year 1

-

-

-

699

26,400

69,240

-

(23,250)

73,089

2,000,000

2,073,089

Year 2 73,089 1,462 3,654 839 26,400 83,088 - (27,046) 161,487 2,000,000 2,161,487

Year 3 161,487 3,230 8,074 1,007 26,400 99,706 - (30,709) 269,194 2,000,000 2,269,194

Year 4 269,194 5,384 13,460 1,209 26,400 119,647 - (34,373) 400,920 2,000,000 2,400,920

Year 5 400,920 8,018 20,046 1,450 26,400 143,576 - (38,142) 562,269 2,000,000 2,562,269

Year 6 562,269 11,245 28,113 1,740 26,400 172,291 - (42,099) 759,960 2,000,000 2,759,960

Year 7 759,960 15,199 37,998 2,088 26,400 206,750 - (46,315) 1,002,080 2,000,000 3,002,080

Year 8 1,002,080 20,042 50,104 2,506 1,026,400 248,099 1,863,646 (3,255,294) 957,583 2,000,000 2,957,583

* Assumes Private Equity growth profits are realized year 8

Carrier GRAT

Beginning

of Year

Income

Growth

Distribution

from FLLC

Note

Payments

Income

Taxes

End of Year

Year 1

-

-

-

69,240

(69,240)

-

-

Year 2 - - - 83,088 (83,088) - -

Year 3 - - - 99,706 (99,706) - -

Year 4 - - - 119,647 (119,647) - -

Year 5 - - - 143,576 (143,576) - -

Year 6 - - - 172,291 (172,291) - -

Year 7 - - - 206,750 (206,750) - -

Year 8 - - - 248,099 (248,099) - -

Note #1 Between Iam A Carrier and Holdco, FLLC for the Purchase of Financial Assets

Beginning

of Year

Interest

Note

Payment

End of Year

Year 1

1,000,000

26,400

(26,400)

1,000,000

Year 2 1,000,000 26,400 (26,400) 1,000,000

Year 3 1,000,000 26,400 (26,400) 1,000,000

Year 4 1,000,000 26,400 (26,400) 1,000,000

Year 5 1,000,000 26,400 (26,400) 1,000,000

Year 6 1,000,000 26,400 (26,400) 1,000,000

Year 7 1,000,000 26,400 (26,400) 1,000,000

Year 8 1,000,000 26,400 (1,026,400) -

Schedule 6

Analysis of Leveraged FLLC Asset GRAT When One of the Assets of the FLLC is a Non-Charitable Interest in a CRUT

Numerical Summary of Alternatives - Future Values This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown

herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Hypothetical Technique

(Assumes $9.83mm Estate Tax

Exemption Available)

Charlie's

Descendants

Charity

Charlie's

Consumption

Direct Costs

Consumption

Investment

Opportunity

Costs

IRS

Taxes on

Investment

Income

IRS

Investment

Opportunity

Costs

IRS Estate

Taxes

(@40.0%)

Total

Future Values at the end of 25 Years Assuming an Annual Compounded Rate of Return at 7.4%

Stock Sale, No Planning

$19,745,860

$0

$5,123,665

$7,440,046

$11,792,247

$23,763,728

$6,610,574

$74,476,121

Simulated Tax Holiday (No Initial Capital

Gains Tax and No Estate Tax) 78% -

22% Split Between Family and Charity

$27,251,647

$7,539,379

$5,123,665

$7,440,046

$11,817,313

$15,304,071

$0

$74,476,121

FLLC/CRUT/Holdco/LevGRAT, Charlie

gives remaining estate to charity

$24,972,689

$7,539,379

$5,123,665

$7,440,046

$12,581,416

$16,818,926

$0

$74,476,121

FLLC/Holdco/LevGRAT (no CRUT),

Charlie gives remaining estate to family

$25,552,526

$0

$5,123,665

$7,440,046

$12,596,156

$23,763,728

$0

$74,476,121

1

Assumptions: Total Estimated Rate of Return 7.40%

Rate of Return Taxed at Ordinary Rates 3.00%

Rate of Return Tax Free 0.00%

Rate of Return Taxed at Capital Gains Rates 4.40%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Capital Gains Tax Rate on Growth (includes income taxes, surtax on inv. income & stealth tax) 25.00%

Ordinary Tax Rate (includes income taxes, surtax on inv. income & stealth tax) 44.60%

Consumption (increasing at 3% per year) $150,000

Charlie Charitable

Schedule 6

Analysis of Leveraged FLLC Asset GRAT When One of the Assets of the FLLC is a Non-Charitable Interest in a CRU

Stock Sale, No Planning This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from

the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the

results shown.

Beginning

of Year

Income

Tax

Free

Income

Growth

Consumption

Income

Taxes

End

of Year

Year 1

12,500,000

375,000

-

550,000

(150,000)

(2,708,500)

10,566,500 Year 2 10,566,500 316,995 - 464,926 (153,750) (205,124) 10,989,547

Year 3 10,989,547 329,686 - 483,540 (157,594) (227,927) 11,417,253

Year 4 11,417,253 342,518 - 502,359 (161,534) (247,060) 11,853,535

Year 5 11,853,535 355,606 - 521,556 (165,572) (263,725) 12,301,400

Year 6 12,301,400 369,042 - 541,262 (169,711) (278,775) 12,763,217

Year 7 12,763,217 382,897 - 561,582 (173,954) (292,818) 13,240,924

Year 8 13,240,924 397,228 - 582,601 (178,303) (306,291) 13,736,158

Year 9 13,736,158 412,085 - 604,391 (182,760) (319,508) 14,250,365

Year 10 14,250,365 427,511 - 627,016 (187,329) (332,699) 14,784,864

Year 11 14,784,864 443,546 - 650,534 (192,013) (346,032) 15,340,899

Year 12 15,340,899 460,227 - 675,000 (196,813) (359,633) 15,919,679

Year 13 15,919,679 477,590 - 700,466 (201,733) (373,601) 16,522,401

Year 14 16,522,401 495,672 - 726,986 (206,777) (388,011) 17,150,272

Year 15 17,150,272 514,508 - 754,612 (211,946) (402,925) 17,804,521

Year 16 17,804,521 534,136 - 783,399 (217,245) (418,398) 18,486,413

Year 17 18,486,413 554,592 - 813,402 (222,676) (434,474) 19,197,257

Year 18 19,197,257 575,918 - 844,679 (228,243) (451,199) 19,938,413

Year 19 19,938,413 598,152 - 877,290 (233,949) (468,610) 20,711,296

Year 20 20,711,296 621,339 - 911,297 (239,798) (486,748) 21,517,386

Year 21 21,517,386 645,522 - 946,765 (245,792) (505,652) 22,358,228

Year 22 22,358,228 670,747 - 983,762 (251,937) (525,360) 23,235,440

Year 23 23,235,440 697,063 - 1,022,359 (258,236) (545,912) 24,150,715

Year 24 24,150,715 724,521 - 1,062,631 (264,692) (567,349) 25,105,828

Year 25 25,105,828 753,175 - 1,104,656 (271,309) (335,916) 26,356,434

2

Assumptions: Total Estimated Rate of Return 7.40%

Rate of Return Taxed at Ordinary Rates 3.00%

Rate of Return Tax Free 0.00%

Rate of Return Taxed at Capital Gains Rates 4.40%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Capital Gains Tax Rate (includes income taxes, surtax on inv. income & stealth tax) 25.00%

Ordinary Tax Rate (includes income taxes, surtax on inv. income & stealth tax) 44.60%

Charlie Charitable

Schedule 6

Analysis of Leveraged FLLC Asset GRAT When One of the Assets of the FLLC is a Non-Charitable Interest in a CRU

Simulated Tax Holiday (No Initial Capital Gains Tax and No Estate Tax) 78% - 22% Split Between Family and Charity This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from

the examples shown herein. These examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the

results shown.

Beginning

of Year

Income

Tax

Free

Income

Growth

Consumption

Taxes on

Investment

Income

End

of Year

Year 1

12,500,000

375,000

-

550,000

(150,000)

(208,500)

13,066,500

Year 2 13,066,500 391,995 - 574,926 (153,750) (246,824) 13,632,847

Year 3 13,632,847 408,985 - 599,845 (157,594) (277,792) 14,206,292

Year 4 14,206,292 426,189 - 625,077 (161,534) (303,730) 14,792,294

Year 5 14,792,294 443,769 - 650,861 (165,572) (326,290) 15,395,061

Year 6 15,395,061 461,852 - 677,383 (169,711) (346,648) 16,017,936

Year 7 16,017,936 480,538 - 704,789 (173,954) (365,643) 16,663,666

Year 8 16,663,666 499,910 - 733,201 (178,303) (383,876) 17,334,599

Year 9 17,334,599 520,038 - 762,722 (182,760) (401,782) 18,032,816

Year 10 18,032,816 540,984 - 793,444 (187,329) (419,679) 18,760,236

Year 11 18,760,236 562,807 - 825,450 (192,013) (437,801) 19,518,680

Year 12 19,518,680 585,560 - 858,822 (196,813) (456,324) 20,309,926

Year 13 20,309,926 609,298 - 893,637 (201,733) (475,384) 21,135,743

Year 14 21,135,743 634,072 - 929,973 (206,777) (495,090) 21,997,921

Year 15 21,997,921 659,938 - 967,909 (211,946) (515,531) 22,898,289

Year 16 22,898,289 686,949 - 1,007,525 (217,245) (536,783) 23,838,735

Year 17 23,838,735 715,162 - 1,048,904 (222,676) (558,913) 24,821,213

Year 18 24,821,213 744,636 - 1,092,133 (228,243) (581,983) 25,847,757

Year 19 25,847,757 775,433 - 1,137,301 (233,949) (606,053) 26,920,489

Year 20 26,920,489 807,615 - 1,184,502 (239,798) (631,181) 28,041,627

Year 21 28,041,627 841,249 - 1,233,832 (245,792) (657,424) 29,213,491

Year 22 29,213,491 876,405 - 1,285,394 (251,937) (684,840) 30,438,512

Year 23 30,438,512 913,155 - 1,339,295 (258,236) (713,489) 31,719,238

Year 24 31,719,238 951,577 - 1,395,646 (264,692) (743,432) 33,058,338

Year 25 33,058,338 991,750 - 1,454,567 (271,309) (442,321) 34,791,025

3

4

Assumptions (continued): $1,000,200 Charitable Deduction

Income Tax Benefit to Charlie 39.6% $396,079

CRUT Starting Value

$10,000,000

CRUT Actuarial Discount 10.0% ($1,000,000)

Value of FLLC Actuarial Interest in CRUT - Year 1

$9,000,000

Discounted Value of Partnership Actuarial Interest 35.0% $5,850,000

99% Transferred to Holdco FLLC 99.0% $5,791,500

$2,000,000 Holdco Cash

Total Holdco Value

$7,791,500

$7,012,350 90% Note 90.0%

Holdco Net Value

$779,150

Discounted Value of Holdco FLLC 20.0% $623,320

99% Transferred to GRAT 99.0% $617,087

Ownership

Charlie

Charitable

Financial

FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

Charlie

Charitable

GRAT &

Grantor

Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00% 1.00% 99.00%

Schedule 6

Analysis of Leveraged FLLC Asset GRAT When One of the Assets of the FLLC is a Non-Charitable Interest in a CRUT

FLLC/CRUT/Holdco/LevGRAT, Charlie gives remaining estate to charity This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative

purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Rates

Rate of Return Tax Free

Rate of Return Taxed at Capital Gains Rates

Turnover Rate (% of Capital Gains Recognized/Year)

Capital Gains Tax Rate (includes income taxes, surtax on inv. income & stealth tax)

Ordinary Tax Rate (includes income taxes, surtax on inv. income & stealth tax)

Consumption (increasing at 2.5% per year)

Intra-Family Note Interest Percentage

IRS 7520 Rate (Best)

Unitrust Percentage

GRAT Payout Percentage

Financial

Assets

7.40%

3.00%

0.00%

4.40%

30.00%

25.00%

44.60%

$150,000

1.82%

2.20%

10.934%

34.810%

Charlie Charitable

Beginning

of Year

Income

Tax

Free

Income

Growth

Charitable

FLLC

Distributions

Holdco

FLLC

Distributions

Note

Payments

GRAT

Annuity

Payments Consumption

Taxes on

Investment

Income

End

of Year

Year 1 500,000 15,000 - 22,000 3,322 2,170 328,829 214,811 (150,000) 22,229 958,360

Year 2 958,360 28,751 - 42,168 8,331 2,170 824,778 214,811 (153,750) (387,079) 1,538,539

Year 3 1,538,539 46,156 - 67,696 8,282 2,170 819,900 214,811 (157,594) (395,535) 2,144,424

Year 4 2,144,424 64,333 - 94,355 8,236 - 815,336 - (161,534) (404,332) 2,560,817

Year 5 2,560,817 76,825 - 112,676 8,192 - 811,014 - (165,572) (413,562) 2,990,390

Year 6 2,990,390 89,712 - 131,577 8,150 - 806,882 - (169,711) (423,294) 3,433,705

Year 7 3,433,705 103,011 - 151,083 8,110 - 802,900 - (173,954) (433,585) 3,891,270

Year 8 3,891,270 116,738 - 171,216 8,071 - 799,038 - (178,303) (444,480) 4,363,551

Year 9 4,363,551 130,907 - 191,996 8,033 - 795,273 - (182,760) (456,020) 4,850,980

Year 10 4,850,980 145,529 - 213,443 7,996 - 791,590 - (187,329) (468,241) 5,353,967

Year 11 5,353,967 160,619 - 235,575 7,959 - 191,378 - (192,013) (481,178) 5,276,308

Year 12 5,276,308 158,289 - 232,158 7,923 3,741 - - (196,813) (494,863) 4,986,744

Year 13 4,986,744 149,602 - 219,417 7,888 3,849 - - (201,733) (509,329) 4,656,437

Year 14 4,656,437 139,693 - 204,883 7,853 3,970 - - (206,777) (524,608) 4,281,451

Year 15 4,281,451 128,444 - 188,384 7,818 4,104 - - (211,946) (540,735) 3,857,519

Year 16 3,857,519 115,726 - 169,731 7,783 4,250 - - (217,245) (557,744) 3,380,020

Year 17 3,380,020 101,401 - 148,721 7,749 4,407 - - (222,676) (575,670) 2,843,950

Year 18 2,843,950 85,319 - 125,134 7,714 4,576 - - (228,243) (594,553) 2,243,897

Year 19 2,243,897 67,317 - 98,731 7,680 4,756 - - (233,949) (614,430) 1,574,001

Year 20 1,574,001 47,220 - 69,256 7,645 4,947 - - (239,798) (58,913) 1,404,360

Year 21 1,404,360 42,131 - 61,792 993 3,534 - - (245,792) (49,142) 1,217,874

Year 22 1,217,874 36,536 - 53,586 1,037 3,746 - - (251,937) (43,171) 1,017,671

Year 23 1,017,671 30,530 - 44,778 1,085 3,959 - - (258,236) (37,480) 802,307

Year 24 802,307 24,069 - 35,301 1,137 4,176 - - (264,692) (31,866) 570,433

Year 25 570,433 17,113 - 25,099 2,380 8,732 - - (271,309) (18,720) 333,728

Charitable FLLC

Beginning

of Year

Income

Tax

Free

Income

Growth

Unitrust

Payments

Distributions

End

of Year

Year 1 - - - - 1,093,400 (332,150) 761,250

Year 2 761,250 22,838 - 33,495 1,054,759 (833,109) 1,039,232

Year 3 1,039,232 31,177 - 45,726 1,017,484 (828,181) 1,305,438

Year 4 1,305,438 39,163 - 57,439 981,526 (823,572) 1,559,995

Year 5 1,559,995 46,800 - 68,640 946,839 (819,206) 1,803,067

Year 6 1,803,067 54,092 - 79,335 913,378 (815,032) 2,034,840

Year 7 2,034,840 61,045 - 89,533 881,099 (811,010) 2,255,507

Year 8 2,255,507 67,665 - 99,242 849,961 (807,109) 2,465,267

Year 9 2,465,267 73,958 - 108,472 819,923 (803,307) 2,664,313

Year 10 2,664,313 79,929 - 117,230 790,947 (799,586) 2,852,834

Year 11 2,852,834 85,585 - 125,525 762,995 (795,932) 3,031,007

Year 12 3,031,007 90,930 - 133,364 736,031 (792,333) 3,199,000

Year 13 3,199,000 95,970 - 140,756 710,020 (788,779) 3,356,967

Year 14 3,356,967 100,709 - 147,707 684,927 (785,262) 3,505,048

Year 15 3,505,048 105,151 - 154,222 660,722 (781,773) 3,643,372

Year 16 3,643,372 109,301 - 160,308 637,372 (778,304) 3,772,049

Year 17 3,772,049 113,161 - 165,970 614,847 (774,850) 3,891,178

Year 18 3,891,178 116,735 - 171,212 593,119 (771,403) 4,000,840

Year 19 4,000,840 120,025 - 176,037 572,158 (767,957) 4,101,103

Year 20 4,101,103 123,033 - 180,449 551,938 (764,505) 4,192,018

Year 21 4,192,018 125,761 - 184,449 - (99,299) 4,402,929

Year 22 4,402,929 132,088 - 193,729 - (103,688) 4,625,058

Year 23 4,625,058 138,752 - 203,503 - (108,489) 4,858,823

Year 24 4,858,823 145,765 - 213,788 - (113,669) 5,104,706

Year 25 5,104,706 153,141 - 224,607 - (237,989) 5,244,465

Financial FLLC

Beginning

of Year

Income

Tax

Free

Income

Growth

Charitable

FLLC

Distributions

Note

Payments

Distributions

End

of Year

Year 1 2,000,000 60,000 - 88,000 328,829 (328,829) (216,980) 1,931,020

Year 2 1,931,020 57,931 - 84,965 824,778 (824,778) (216,980) 1,856,934

Year 3 1,856,934 55,708 - 81,705 819,900 (819,900) (216,980) 1,777,367

Year 4 1,777,367 53,321 - 78,204 815,336 (815,336) - 1,908,892

Year 5 1,908,892 57,267 - 83,991 811,014 (811,014) - 2,050,150

Year 6 2,050,150 61,505 - 90,207 806,882 (806,882) - 2,201,861

Year 7 2,201,861 66,056 - 96,882 802,900 (802,900) - 2,364,799

Year 8 2,364,799 70,944 - 104,051 799,038 (799,038) - 2,539,794

Year 9 2,539,794 76,194 - 111,751 795,273 (795,273) - 2,727,739

Year 10 2,727,739 81,832 - 120,021 791,590 (791,590) - 2,929,592

Year 11 2,929,592 87,888 - 128,902 787,972 (191,378) - 3,742,975

Year 12 3,742,975 112,289 - 164,691 784,409 - (374,124) 4,430,241

Year 13 4,430,241 132,907 - 194,931 780,891 - (384,873) 5,154,097

Year 14 5,154,097 154,623 - 226,780 777,409 - (397,004) 5,915,906

Year 15 5,915,906 177,477 - 260,300 773,955 - (410,396) 6,717,241

Year 16 6,717,241 201,517 - 295,559 770,521 - (424,976) 7,559,862

Year 17 7,559,862 226,796 - 332,634 767,102 - (440,705) 8,445,689

Year 18 8,445,689 253,371 - 371,610 763,689 - (457,570) 9,376,789

Year 19 9,376,789 281,304 - 412,579 760,277 - (475,576) 10,355,372

Year 20 10,355,372 310,661 - 455,636 756,860 - (494,743) 11,383,786

Year 21 11,383,786 341,514 - 500,887 98,306 - (353,359) 11,971,134

Year 22 11,971,134 359,134 - 526,730 102,651 - (374,587) 12,585,061

Year 23 12,585,061 377,552 - 553,743 107,405 - (395,917) 13,227,843

Year 24 13,227,843 396,835 - 582,025 112,533 - (417,637) 13,901,599

Year 25 13,901,599 417,048 - 611,670 235,609 - (873,195) 14,292,732

3-Year GRAT

Beginning

of Year

Income

Tax

Free

Income

Growth

Holdco

FLLC

Distributions

Annual

Annuity

GRAT

Terminates

End

of Year

Year 1 - - - - 214,811 (214,811) - -

Year 2 - - - - 214,811 (214,811) - -

Year 3 - - - - 214,811 (214,811) - -

New Grantor Trust (GRAT Remaindermen) - grantor trust status removed in year 20

Beginning

of Year

Income

Tax

Free

Income

Growth

Holdco

FLLC

Distributions

Income

Taxes

End

of Year

Year 1 - - - - - - -

Year 2 - - - - - - -

Year 3 - - - - - - -

Year 4 - - - - - - -

Year 5 - - - - - - -

Year 6 - - - - - - -

Year 7 - - - - - - -

Year 8 - - - - - - -

Year 9 - - - - - - -

Year 10 - - - - - - -

Year 11 - - - - - - -

Year 12 - - - - 370,383 - 370,383

Year 13 370,383 11,111 - 16,297 381,024 - 778,815

Year 14 778,815 23,364 - 34,268 393,034 - 1,229,481

Year 15 1,229,481 36,884 - 54,097 406,292 - 1,726,755

Year 16 1,726,755 51,803 - 75,977 420,726 - 2,275,261

Year 17 2,275,261 68,258 - 100,111 436,298 - 2,879,929

Year 18 2,879,929 86,398 - 126,717 452,995 - 3,546,038

Year 19 3,546,038 106,381 - 156,026 470,821 - 4,279,265

Year 20 4,279,265 128,378 - 188,288 489,795 (576,432) 4,509,294

Year 21 4,509,294 135,279 - 198,409 349,825 (446,456) 4,746,351

Year 22 4,746,351 142,391 - 208,839 370,842 (475,080) 4,993,343

Year 23 4,993,343 149,800 - 219,707 391,957 (503,403) 5,251,404

Year 24 5,251,404 157,542 - 231,062 413,461 (531,925) 5,521,543

Year 25 5,521,543 165,646 - 242,948 864,463 (1,111,816) 5,682,784

Charitable Remainder Unitrust

Beginning

of Year

Income

Tax

Free

Income

Growth

Unitrust

Payment

Payment

to Charity

End

of Year

Year 1 10,000,000 300,000 - 440,000 (1,093,400) - 9,646,600

Year 2 9,646,600 289,398 - 424,450 (1,054,759) - 9,305,689

Year 3 9,305,689 279,171 - 409,450 (1,017,484) - 8,976,826

Year 4 8,976,826 269,305 - 394,980 (981,526) - 8,659,585

Year 5 8,659,585 259,788 - 381,022 (946,839) - 8,353,555

Year 6 8,353,555 250,607 - 367,556 (913,378) - 8,058,341

Year 7 8,058,341 241,750 - 354,567 (881,099) - 7,773,559

Year 8 7,773,559 233,207 - 342,037 (849,961) - 7,498,841

Year 9 7,498,841 224,965 - 329,949 (819,923) - 7,233,832

Year 10 7,233,832 217,015 - 318,289 (790,947) - 6,978,189

Year 11 6,978,189 209,346 - 307,040 (762,995) - 6,731,579

Year 12 6,731,579 201,947 - 296,189 (736,031) - 6,493,685

Year 13 6,493,685 194,811 - 285,722 (710,020) - 6,264,199

Year 14 6,264,199 187,926 - 275,625 (684,927) - 6,042,822

Year 15 6,042,822 181,285 - 265,884 (660,722) - 5,829,269

Year 16 5,829,269 174,878 - 256,488 (637,372) - 5,623,262

Year 17 5,623,262 168,698 - 247,424 (614,847) - 5,424,536

Year 18 5,424,536 162,736 - 238,680 (593,119) - 5,232,833

Year 19 5,232,833 156,985 - 230,245 (572,158) - 5,047,905

Year 20 5,047,905 151,437 - 222,108 (551,938) (4,869,512) -

Charity

Beginning

of Year

Income

Tax

Free

Income

Growth

CRUT

Distribution

End

of Year

Year 1 - - - - - -

Year 2 - - - - - -

Year 3 - - - - - -

Year 4 - - - - - -

Year 5 - - - - - -

Year 6 - - - - - -

Year 7 - - - - - -

Year 8 - - - - - -

Year 9 - - - - - -

Year 10 - - - - - -

Year 11 - - - - - -

Year 12 - - - - - -

Year 13 - - - - - -

Year 14 - - - - - -

Year 15 - - - - - -

Year 16 - - - - - -

Year 17 - - - - - -

Year 18 - - - - - -

Year 19 - - - - - -

Year 20 - - - - 4,869,512 4,869,512

Year 21 4,869,512 146,085 - 214,259 - 5,229,856

Year 22 5,229,856 156,896 - 230,114 - 5,616,865

Year 23 5,616,865 168,506 - 247,142 - 6,032,513

Year 24 6,032,513 180,975 - 265,431 - 6,478,919

Year 25 6,478,919 194,368 - 285,072 - 6,958,359

Note Between Charlie Charitable and Holdco FLLC

Beginning

of Year

Interest

Note

Payment

End

of Year

Year 1 7,012,350 127,625 (328,829) 6,811,146

Year 2 6,811,146 123,963 (824,778) 6,110,331

Year 3 6,110,331 111,208 (819,900) 5,401,639

Year 4 5,401,639 98,310 (815,336) 4,684,613

Year 5 4,684,613 85,260 (811,014) 3,958,859

Year 6 3,958,859 72,051 (806,882) 3,224,028

Year 7 3,224,028 58,677 (802,900) 2,479,806

Year 8 2,479,806 45,132 (799,038) 1,725,900

Year 9 1,725,900 31,411 (795,273) 962,038

Year 10 962,038 17,509 (791,590) 187,958

Year 11 187,958 3,421 (191,378) -

Year 12 - - - -

Year 13 - - - -

Year 14 - - - -

Year 15 - - - -

Year 16 - - - -

Year 17 - - - -

Year 18 - - - -

Year 19 - - - -

Year 20 - - - -

Year 21 - - - -

Year 22 - - - -

Year 23 - - - -

Year 24 - - - -

Year 25 - - - -

5

Assumptions (continued):

Discounted Value of Financial Assets FLLC 35.0%

99% Transferred to Holdco FLLC 99.0%

Holdco Cash

Total Holdco Value

90% Note 90.0%

Holdco Net Value

Discounted Value of Holdco FLLC 20.0%

99% Transferred to GRAT 99.0%

$6,500,000

$6,435,000

$2,000,000

$8,435,000

$7,591,500

$843,500

$674,800

$668,052

Ownership

Charlie

Charitable

Financial

FLLC

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Ownership

Charlie

Charitable

GRAT &

Grantor

Trust

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

1.00% 99.00%

Schedule 6

Analysis of Leveraged FLLC Asset GRAT When One of the Assets of the FLLC is a Non-Charitable Interest in a CRUT

FLLC/CRUT/Holdco/LevGRAT, Charlie gives remaining estate to charity This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no

representation is being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return

Rate of Return Taxed at Ordinary Rates

Rate of Return Tax Free

Rate of Return Taxed at Capital Gains Rates

Turnover Rate (% of Capital Gains Recognized/Year)

Capital Gains Tax Rate (includes income taxes, surtax on inv. income & stealth tax)

Ordinary Tax Rate (includes income taxes, surtax on inv. income & stealth tax)

Consumption (increasing at 2.5% per year)

Intra-Family Note Interest Percentage

IRS 7520 Rate (Best)

GRAT Payout Percentage

Financial

Assets

7.40%

3.00%

0.00%

4.40%

30.00%

25.00%

44.60%

$150,000

1.82%

2.20%

34.810%

Charlie Charitable

Beginning

of Year

Income

Tax

Free

Income

Growth

Financial

Assets FLLC

Distributions

Holdco

FLLC

Distributions

Note

Payments

GRAT

Annuity

Payments Consumption

Taxes on

Investment

Income

End

of Year

Year 1 500,000 15,000 - 22,000 26,668 2,349 2,059,931 232,552 (150,000) (2,708,500) -

Year 2 - - - - 2,422 2,349 121,551 232,552 (153,750) (205,124) -

Year 3 - - - - 2,529 2,349 148,091 232,552 (157,594) (227,927) -

Year 4 - - - - 2,640 - 405,954 - (161,534) (247,060) -

Year 5 - - - - 2,756 - 426,541 - (165,572) (263,725) -

Year 6 - - - - 2,877 - 445,609 - (169,711) (278,775) -

Year 7 - - - - 3,004 - 463,768 - (173,954) (292,818) -

Year 8 - - - - 3,136 - 481,458 - (178,303) (306,291) -

Year 9 - - - - 3,274 - 498,995 - (182,760) (319,508) -

Year 10 - - - - 3,418 - 516,610 - (187,329) (332,699) -

Year 11 - - - - 3,568 - 3,002,757 - (192,013) (346,032) 2,468,281

Year 12 2,468,281 74,048 - 108,604 3,725 3,184 - - (196,813) (47,255) 2,413,775

Year 13 2,413,775 72,413 - 106,206 3,889 3,276 - - (201,733) (52,259) 2,345,568

Year 14 2,345,568 70,367 - 103,205 4,060 3,392 - - (206,777) (55,230) 2,264,586

Year 15 2,264,586 67,938 - 99,642 4,239 3,528 - - (211,946) (56,698) 2,171,289

Year 16 2,171,289 65,139 - 95,537 4,426 3,682 - - (217,245) (57,033) 2,065,794

Year 17 2,065,794 61,974 - 90,895 4,620 3,851 - - (222,676) (56,493) 1,947,965

Year 18 1,947,965 58,439 - 85,710 4,824 4,033 - - (228,243) (55,253) 1,817,474

Year 19 1,817,474 54,524 - 79,969 5,036 4,227 - - (233,949) (53,434) 1,673,848

Year 20 1,673,848 50,215 - 73,649 5,257 4,435 - - (239,798) (51,114) 1,516,493

Year 21 1,516,493 45,495 - 66,726 5,489 4,654 - - (245,792) (48,344) 1,344,721

Year 22 1,344,721 40,342 - 59,168 5,730 4,886 - - (251,937) (45,153) 1,157,756

Year 23 1,157,756 34,733 - 50,941 5,982 5,130 - - (258,236) (41,555) 954,751

Year 24 954,751 28,643 - 42,009 6,246 5,387 - - (264,692) (37,556) 734,789

Year 25 734,789 22,044 - 32,331 6,520 11,273 - - (271,309) (31,166) 504,481

Charitable FLLC

Beginning

of Year

Income

Tax

Free

Income

Growth

Distributions

End

of Year

Year 1 10,000,000 300,000 - 440,000 (2,666,800) 8,073,200

Year 2 8,073,200 242,196 - 355,221 (242,196) 8,428,421

Year 3 8,428,421 252,853 - 370,851 (252,853) 8,799,271

Year 4 8,799,271 263,978 - 387,168 (263,978) 9,186,439

Year 5 9,186,439 275,593 - 404,203 (275,593) 9,590,643

Year 6 9,590,643 287,719 - 421,988 (287,719) 10,012,631

Year 7 10,012,631 300,379 - 440,556 (300,379) 10,453,187

Year 8 10,453,187 313,596 - 459,940 (313,596) 10,913,127

Year 9 10,913,127 327,394 - 480,178 (327,394) 11,393,304

Year 10 11,393,304 341,799 - 501,305 (341,799) 11,894,610

Year 11 11,894,610 356,838 - 523,363 (356,838) 12,417,973

Year 12 12,417,973 372,539 - 546,391 (372,539) 12,964,363

Year 13 12,964,363 388,931 - 570,432 (388,931) 13,534,795

Year 14 13,534,795 406,044 - 595,531 (406,044) 14,130,326

Year 15 14,130,326 423,910 - 621,734 (423,910) 14,752,061

Year 16 14,752,061 442,562 - 649,091 (442,562) 15,401,151

Year 17 15,401,151 462,035 - 677,651 (462,035) 16,078,802

Year 18 16,078,802 482,364 - 707,467 (482,364) 16,786,269

Year 19 16,786,269 503,588 - 738,596 (503,588) 17,524,865

Year 20 17,524,865 525,746 - 771,094 (525,746) 18,295,959

Year 21 18,295,959 548,879 - 805,022 (548,879) 19,100,982

Year 22 19,100,982 573,029 - 840,443 (573,029) 19,941,425

Year 23 19,941,425 598,243 - 877,423 (598,243) 20,818,847

Year 24 20,818,847 624,565 - 916,029 (624,565) 21,734,877

Year 25 21,734,877 652,046 - 956,335 (652,046) 22,691,211

Financial FLLC

Beginning

of Year

Income

Tax

Free

Income

Growth

Financial

Assets FLLC

Distributions

Note

Payments

Distributions

End

of Year

Year 1 2,000,000 60,000 - 88,000 2,640,132 (2,059,931) (234,901) 2,493,300

Year 2 2,493,300 74,799 - 109,705 239,774 (121,551) (234,901) 2,561,126

Year 3 2,561,126 76,834 - 112,690 250,324 (148,091) (234,901) 2,617,981

Year 4 2,617,981 78,539 - 115,191 261,338 (405,954) - 2,667,096

Year 5 2,667,096 80,013 - 117,352 272,837 (426,541) - 2,710,757

Year 6 2,710,757 81,323 - 119,273 284,842 (445,609) - 2,750,587

Year 7 2,750,587 82,518 - 121,026 297,375 (463,768) - 2,787,737

Year 8 2,787,737 83,632 - 122,660 310,460 (481,458) - 2,823,031

Year 9 2,823,031 84,691 - 124,213 324,120 (498,995) - 2,857,061

Year 10 2,857,061 85,712 - 125,711 338,381 (516,610) - 2,890,254

Year 11 2,890,254 86,708 - 127,171 353,270 (3,002,757) - 454,645

Year 12 454,645 13,639 - 20,004 368,814 - (318,430) 538,673

Year 13 538,673 16,160 - 23,702 385,042 - (327,567) 636,010

Year 14 636,010 19,080 - 27,984 401,983 - (339,196) 745,861

Year 15 745,861 22,376 - 32,818 419,671 - (352,848) 867,877

Year 16 867,877 26,036 - 38,187 438,136 - (368,204) 1,002,033

Year 17 1,002,033 30,061 - 44,089 457,414 - (385,052) 1,148,545

Year 18 1,148,545 34,456 - 50,536 477,540 - (403,256) 1,307,822

Year 19 1,307,822 39,235 - 57,544 498,552 - (422,737) 1,480,416

Year 20 1,480,416 44,412 - 65,138 520,488 - (443,455) 1,667,000

Year 21 1,667,000 50,010 - 73,348 543,390 - (465,397) 1,868,351

Year 22 1,868,351 56,051 - 82,207 567,299 - (488,573) 2,085,335

Year 23 2,085,335 62,560 - 91,755 592,260 - (513,009) 2,318,901

Year 24 2,318,901 69,567 - 102,032 618,320 - (538,741) 2,570,078

Year 25 2,570,078 77,102 - 113,083 645,526 - (1,127,257) 2,278,532

3-Year GRAT

Beginning

of Year

Income

Tax

Free

Income

Growth

Holdco

FLLC

Distributions

Annual

Annuity

GRAT

Terminates

End

of Year

Year 1 - - - - 232,552 (232,552) - -

Year 2 - - - - 232,552 (232,552) - -

Year 3 - - - - 232,552 (232,552) - -

New Grantor Trust (GRAT Remaindermen) - grantor trust status removed in year 12

Beginning

of Year

Income

Tax

Free

Income

Growth

Holdco

FLLC

Distributions

Income

Taxes

End

of Year

Year 1 - - - - - - -

Year 2 - - - - - - -

Year 3 - - - - - - -

Year 4 - - - - - - -

Year 5 - - - - - - -

Year 6 - - - - - - -

Year 7 - - - - - - -

Year 8 - - - - - - -

Year 9 - - - - - - -

Year 10 - - - - - - -

Year 11 - - - - - - -

Year 12 - - - - 315,246 (312,378) 2,867

Year 13 2,867 86 - 126 324,291 (321,342) 6,028

Year 14 6,028 181 - 265 335,804 (332,781) 9,497

Year 15 9,497 285 - 418 349,320 (346,227) 13,293

Year 16 13,293 399 - 585 364,522 (361,364) 17,435

Year 17 17,435 523 - 767 381,201 (377,981) 21,945

Year 18 21,945 658 - 966 399,224 (395,945) 26,847

Year 19 26,847 805 - 1,181 418,510 (415,177) 32,167

Year 20 32,167 965 - 1,415 439,020 (435,635) 37,933

Year 21 37,933 1,138 - 1,669 460,743 (457,308) 44,175

Year 22 44,175 1,325 - 1,944 483,688 (480,207) 50,925

Year 23 50,925 1,528 - 2,241 507,879 (504,356) 58,216

Year 24 58,216 1,746 - 2,562 533,354 (529,793) 66,085

Year 25 66,085 1,983 - 2,908 1,115,985 (1,108,659) 78,301

Note Between Charlie Charitable and Holdco FLLC

Beginning

of Year

Interest

Note

Payment

End

of Year

Year 1 7,591,500 138,165 (2,059,931) 5,669,734

Year 2 5,669,734 103,189 (121,551) 5,651,372

Year 3 5,651,372 102,855 (148,091) 5,606,136

Year 4 5,606,136 102,032 (405,954) 5,302,213

Year 5 5,302,213 96,500 (426,541) 4,972,172

Year 6 4,972,172 90,494 (445,609) 4,617,057

Year 7 4,617,057 84,030 (463,768) 4,237,319

Year 8 4,237,319 77,119 (481,458) 3,832,981

Year 9 3,832,981 69,760 (498,995) 3,403,746

Year 10 3,403,746 61,948 (516,610) 2,949,084

Year 11 2,949,084 53,673 (3,002,757) -

Year 12 - - - -

Year 13 - - - -

Year 14 - - - -

Year 15 - - - -

Year 16 - - - -

Year 17 - - - -

Year 18 - - - -

Year 19 - - - -

Year 20 - - - -

Year 21 - - - -

Year 22 - - - -

Year 23 - - - -

Year 24 - - - -

Year 25 - - - -

Hypothetical Technique #1: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to Charity; Contribute and Sell Growth and Financial Assets to another

FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption available at death

13,526,713 - - 0.00%

23,989,144 23,989,144 14,639,877 22.49%

43,844,960 55,436,988 33,831,583 51.96%

15,426,212 15,426,212 9,414,169 14.46%

9,896,673 9,896,673 6,039,652 9.28%

- 1,934,685 1,180,682 1.81%

$106,683,701 $106,683,701 $65,105,963 100.00%

Hypothetical Technique #2: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to a 17.5 Year Grantor CLAT; Contribute and Sell Growth and Financial

Assets to Another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption available at

death

12,968,704 - - 0.00%

16,373,449 16,373,449 9,992,240 15.35%

51,460,655 62,717,877 38,274,898 58.79%

15,934,675 15,934,675 9,724,469 14.94%

9,946,218 9,946,218 6,069,888 9.32%

- 1,711,482 1,044,468 1.60%

$106,683,701 $106,683,701 $65,105,963 100.00%

Schedule 7

George Generous

Hypothetical Integrated Income and Estate Tax Plan Comparisons (assuming George Generous has a life expectancy of 20 years) This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative

purposes only and no representation is being made that any client will or is likely to achieve the results shown.

20-Year Future Values

Pre-

Death

Post

Death

Present

Values

(Discounted

at 2.5%)

Percentage

of Total

No Further Planning Except for $420,000 Annual Gift to Charity: Bequeaths $6mm to Charity at Death; Balance of Estate to Family (assumes $8.69mm inflation adjusted

estate tax exemption available at death)

George Generous 58,540,440 - - 0.00%

Charity 17,989,144 23,989,144 14,639,877 22.49%

Generous Descendants - 35,000,264 21,359,644 32.81%

IRS Income Tax - Direct Cost 14,640,259 14,640,259 8,934,525 13.72%

IRS Income Tax - Investment Opportunity Cost 15,513,858 15,513,858 9,467,657 14.54%

IRS Estate Tax (at 40.0%) - 17,540,176 10,704,260 16.44%

Total $106,683,701 $106,683,701 $65,105,963 100.00%

George Generous

Charity

Generous Descendants

IRS Income Tax - Direct Cost

IRS Income Tax - Investment Opportunity Cost

IRS Estate Tax (at 40.0%)

Total

George Generous

Charity

Generous Descendants

IRS Income Tax - Direct Cost

IRS Income Tax - Investment Opportunity Cost

IRS Estate Tax (at 40.0%)

Total

Calculations of Remaining Estate Tax Exemption

No Further

Planning

Hypothetical

Techniques

Current Exemption 5,430,000 5,430,000

Gifts Made - -

Future Exemption Available in 20 years (assumes 2.5% inflation) 8,690,000 8,690,000

1

Schedule 7

George Generous

Asset Page This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These

examples are for illustrative purposes only and no representation is being made that any client will or is likely to achieve the results shown.

Assets*

George

Generous

FMV: Financial Assets $20,000,000

Basis: Financial Assets $20,000,000

FMV: Securities $6,000,000

Basis: Securities $0

Total Assets $26,000,000

Total Basis $20,000,000

* Information provided by client and client's advisors. There is no proposed planning for George Generous' other assets.

2

3

Assumptions: Total Estimated Rate of Return 7.40%

Rate of Return Taxed at Ordinary Rates 3.00%

Rate of Return Taxed at Capital Gains Rates 4.40%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain Tax Rate and Health Care Tax 25.00%

Ordinary Income Tax Rate and Health Care Tax 44.60%

Charitable Spending $420,000

George Generous

Schedule 7

George Generous

No Further Planning Except for $420,000 Annual Gift to Charity: Bequeaths $6mm to Charity at Death; Balance of Estate to Family (assumes $8.69mm inflation adjusted

estate tax exemption available at death) This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being

made that any client will or is likely to achieve the results shown.

Beginning

of Year

Financial

Assets

Income

Growth

Sale

Proceeds

Charitable

Contributions

Income

Taxes

End of Year

Financial

Assets

Beginning

of Year

Securities

Sale

End of Year

Securities

End of Year

Financial

& Other

Assets

Year 1

20,000,000

600,000

880,000

6,000,000

(420,000)

(1,667,280)

25,392,720

6,000,000

(6,000,000)

-

25,392,720

Year 2 25,392,720 761,782 1,117,280 - (420,000) (303,431) 26,548,351 - - - 26,548,351

Year 3 26,548,351 796,451 1,168,127 - (420,000) (367,504) 27,725,425 - - - 27,725,425

Year 4 27,725,425 831,763 1,219,919 - (420,000) (421,165) 28,935,942 - - - 28,935,942

Year 5 28,935,942 868,078 1,273,181 - (420,000) (467,895) 30,189,307 - - - 30,189,307

Year 6 30,189,307 905,679 1,328,329 - (420,000) (510,174) 31,493,142 - - - 31,493,142

Year 7 31,493,142 944,794 1,385,698 - (420,000) (549,778) 32,853,856 - - - 32,853,856

Year 8 32,853,856 985,616 1,445,570 - (420,000) (587,986) 34,277,055 - - - 34,277,055

Year 9 34,277,055 1,028,312 1,508,190 - (420,000) (625,726) 35,767,831 - - - 35,767,831

Year 10 35,767,831 1,073,035 1,573,785 - (420,000) (663,681) 37,330,969 - - - 37,330,969

Year 11 37,330,969 1,119,929 1,642,563 - (420,000) (702,360) 38,971,101 - - - 38,971,101

Year 12 38,971,101 1,169,133 1,714,728 - (420,000) (742,152) 40,692,810 - - - 40,692,810

Year 13 40,692,810 1,220,784 1,790,484 - (420,000) (783,363) 42,500,715 - - - 42,500,715

Year 14 42,500,715 1,275,021 1,870,031 - (420,000) (826,241) 44,399,527 - - - 44,399,527

Year 15 44,399,527 1,331,986 1,953,579 - (420,000) (870,995) 46,394,097 - - - 46,394,097

Year 16 46,394,097 1,391,823 2,041,340 - (420,000) (917,808) 48,489,452 - - - 48,489,452

Year 17 48,489,452 1,454,684 2,133,536 - (420,000) (966,847) 50,690,824 - - - 50,690,824

Year 18 50,690,824 1,520,725 2,230,396 - (420,000) (1,018,267) 53,003,678 - - - 53,003,678

Year 19 53,003,678 1,590,110 2,332,162 - (420,000) (1,072,222) 55,433,728 - - - 55,433,728

Year 20 55,433,728 1,663,012 2,439,084 - (420,000) (575,383) 58,540,440 - - - 58,540,440

4

Assumptions: Total Estimated Rate of Return 7.40%

Rate of Return Taxed at Ordinary Rates 3.00%

Rate of Return Taxed at Capital Gains Rates 4.40%

Turnover Rate (% of Capital Gains Recognized/Year) 30.00%

Long-Term Capital Gain Tax Rate and Health Care Tax 25.00%

Ordinary Income Tax Rate and Health Care Tax 44.60%

Charitable Spending $420,000

Doing Good Donor Advised Fund

Schedule 7

George Generous

No Further Planning Except for $420,000 Annual Gift to Charity: Bequeaths $6mm to Charity at Death; Balance of Estate to Family (assumes $8.69mm inflation adjusted

estate tax exemption available at death) This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is being

made that any client will or is likely to achieve the results shown.

Beginning

of Year

Financial

Assets

Income

Growth

Charitable

Contributions

Income

Taxes

End of Year

Financial

Assets

Year 1

-

-

-

420,000

-

420,000

Year 2 420,000 12,600 18,480 420,000 - 871,080

Year 3 871,080 26,132 38,328 420,000 - 1,355,540

Year 4 1,355,540 40,666 59,644 420,000 - 1,875,850

Year 5 1,875,850 56,275 82,537 420,000 - 2,434,663

Year 6 2,434,663 73,040 107,125 420,000 - 3,034,828

Year 7 3,034,828 91,045 133,532 420,000 - 3,679,405

Year 8 3,679,405 110,382 161,894 420,000 - 4,371,681

Year 9 4,371,681 131,150 192,354 420,000 - 5,115,185

Year 10 5,115,185 153,456 225,068 420,000 - 5,913,709

Year 11 5,913,709 177,411 260,203 420,000 - 6,771,324

Year 12 6,771,324 203,140 297,938 420,000 - 7,692,402

Year 13 7,692,402 230,772 338,466 420,000 - 8,681,639

Year 14 8,681,639 260,449 381,992 420,000 - 9,744,081

Year 15 9,744,081 292,322 428,740 420,000 - 10,885,143

Year 16 10,885,143 326,554 478,946 420,000 - 12,110,643

Year 17 12,110,643 363,319 532,868 420,000 - 13,426,831

Year 18 13,426,831 402,805 590,781 420,000 - 14,840,416

Year 19 14,840,416 445,212 652,978 420,000 - 16,358,607

Year 20 16,358,607 490,758 719,779 420,000 - 17,989,144

5

Assumptions:

Total Estimated Rate of Return - Financial Assets

7.40% Assumptions:

Generous FLLC Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0

George Generous

Schedule 7

George Generous

Hypothetical Technique #1: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to Charity; Contribute and Sell Growth and Financial Assets to

another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Beginning

of Year

Financial

Assets

Income

Generous Financial

FLLC FLLC

Growth Distributions Distributions

Not

e

Payments

GRAT

Annuity

Payments

Charitable

Spending

Income

Taxes

End of Year

Financial

Assets

Year 1

2,000,000

60,000

88,000

4,200

3,623

213,087

358,657

-

(83,521)

2,644,045

Year 2 2,644,045 79,321 116,338 2,144 3,623 213,087 358,657 - (157,206) 3,260,010

Year 3 3,260,010 97,800 143,440 2,717 3,623 213,087 358,657 - (184,786) 3,894,548

Year 4 3,894,548 116,836 171,360 3,173 - 213,087 - - (209,812) 4,189,193

Year 5 4,189,193 125,676 184,324 3,555 - 213,087 - - (237,761) 4,478,074

Year 6 4,478,074 134,342 197,035 3,890 - 213,087 - - (263,172) 4,763,257

Year 7 4,763,257 142,898 209,583 4,196 - 213,087 - - (647,315) 4,685,707

Year 8 4,685,707 140,571 206,171 4,486 - 213,087 - - (691,811) 4,558,212

Year 9 4,558,212 136,746 200,561 4,768 - 213,087 - - (735,155) 4,378,221

Year 10 4,378,221 131,347 192,642 5,049 - 213,087 - - (778,299) 4,142,047

Year 11 4,142,047 124,261 182,250 5,333 - 213,087 - - (821,942) 3,845,037

Year 12 3,845,037 115,351 169,182 5,623 - 213,087 - - (866,609) 3,481,671

Year 13 3,481,671 104,450 153,194 5,923 - 213,087 - - (912,703) 3,045,622

Year 14 3,045,622 91,369 134,007 6,233 - 11,921,187 - - (960,544) 14,237,875

Year 15 14,237,875 427,136 626,467 6,557 - - - - (1,010,395) 14,287,640

Year 16 14,287,640 428,629 628,656 6,896 - - - - (1,062,483) 14,289,339

Year 17 14,289,339 428,680 628,731 7,250 - - - - (1,117,006) 14,236,995

Year 18 14,236,995 427,110 626,428 7,622 - - - - (1,174,149) 14,124,004

Year 19 14,124,004 423,720 621,456 8,011 - - - - (1,234,090) 13,943,102

Year 20 13,943,102 418,293 613,496 18,441 - - - - (2,277,454) 12,715,878

6

Growth Ownership

George

Generous

Financial

FLLC

1.0%

99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

Assumptions:

Total Estimated Rate of Return - Financial Assets

7.40% Assumptions:

Generous FLLC Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0

Generous FLLC

Schedule 7

George Generous

Hypothetical Technique #1: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to Charity; Contribute and Sell Growth and Financial Assets to

another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Beginning

of Year

Financial

Assets

Income

Growth

Sale Preferred Growth

Proceeds Distributions Distributions

End of Year

Financial

Assets

Beginning

of Year

Securities

Sale

End of Year

Securities

End of Year

Financial

& Other

Assets

Year 1

14,000,000

420,000

616,000

6,000,000

(420,000)

(420,000)

20,196,000

6,000,000

(6,000,000)

-

20,196,000

Year 2 20,196,000 605,880 888,624 - (420,000) (214,424) 21,056,080 - - - 21,056,080

Year 3 21,056,080 631,682 926,468 - (420,000) (271,690) 21,922,539 - - - 21,922,539

Year 4 21,922,539 657,676 964,592 - (420,000) (317,276) 22,807,532 - - - 22,807,532

Year 5 22,807,532 684,226 1,003,531 - (420,000) (355,488) 23,719,801 - - - 23,719,801

Year 6 23,719,801 711,594 1,043,671 - (420,000) (389,013) 24,666,053 - - - 24,666,053

Year 7 24,666,053 739,982 1,085,306 - (420,000) (419,646) 25,651,695 - - - 25,651,695

Year 8 25,651,695 769,551 1,128,675 - (420,000) (448,628) 26,681,292 - - - 26,681,292

Year 9 26,681,292 800,439 1,173,977 - (420,000) (476,833) 27,758,875 - - - 27,758,875

Year 10 27,758,875 832,766 1,221,390 - (420,000) (504,893) 28,888,139 - - - 28,888,139

Year 11 28,888,139 866,644 1,271,078 - (420,000) (533,267) 30,072,594 - - - 30,072,594

Year 12 30,072,594 902,178 1,323,194 - (420,000) (562,300) 31,315,667 - - - 31,315,667

Year 13 31,315,667 939,470 1,377,889 - (420,000) (592,257) 32,620,769 - - - 32,620,769

Year 14 32,620,769 978,623 1,435,314 - (420,000) (623,347) 33,991,359 - - - 33,991,359

Year 15 33,991,359 1,019,741 1,495,620 - (420,000) (655,743) 35,430,977 - - - 35,430,977

Year 16 35,430,977 1,062,929 1,558,963 - (420,000) (689,591) 36,943,278 - - - 36,943,278

Year 17 36,943,278 1,108,298 1,625,504 - (420,000) (725,022) 38,532,059 - - - 38,532,059

Year 18 38,532,059 1,155,962 1,695,411 - (420,000) (762,156) 40,201,275 - - - 40,201,275

Year 19 40,201,275 1,206,038 1,768,856 - (420,000) (801,108) 41,955,062 - - - 41,955,062

Year 20 41,955,062 1,258,652 1,846,023 - (420,000) (1,844,105) 42,795,632 - - - 42,795,632

7

Ownership

George

Generous

GRAT &

Grantor

Trust

1.0%

99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

Assumptions:

Total Estimated Rate of Return - Financial Assets

7.40% Assumptions:

Generous FLLC Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0

Financial FLLC

Schedule 7

George Generous

Hypothetical Technique #1: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to Charity; Contribute and Sell Growth and Financial Assets to

another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Beginning

of Year

Financial

Assets

Income

Generous

FLLC

Growth Distributions

Note Owner

Payments Distributions

End of Year

Financial

Assets

Year 1

4,000,000

120,000

176,000

415,800

(213,087)

(362,279)

4,136,433

Year 2 4,136,433 124,093 182,003 212,280 (213,087) (362,279) 4,079,443

Year 3 4,079,443 122,383 179,495 268,973 (213,087) (362,279) 4,074,928

Year 4 4,074,928 122,248 179,297 314,103 (213,087) - 4,477,488

Year 5 4,477,488 134,325 197,009 351,933 (213,087) - 4,947,668

Year 6 4,947,668 148,430 217,697 385,123 (213,087) - 5,485,831

Year 7 5,485,831 164,575 241,377 415,450 (213,087) - 6,094,145

Year 8 6,094,145 182,824 268,142 444,142 (213,087) - 6,776,166

Year 9 6,776,166 203,285 298,151 472,065 (213,087) - 7,536,580

Year 10 7,536,580 226,097 331,609 499,844 (213,087) - 8,381,043

Year 11 8,381,043 251,431 368,766 527,934 (213,087) - 9,316,086

Year 12 9,316,086 279,483 409,908 556,677 (213,087) - 10,349,066

Year 13 10,349,066 310,472 455,359 586,334 (213,087) - 11,488,144

Year 14 11,488,144 344,644 505,478 617,114 (11,921,187) - 1,034,193

Year 15 1,034,193 31,026 45,504 649,185 - - 1,759,908

Year 16 1,759,908 52,797 77,436 682,695 - - 2,572,837

Year 17 2,572,837 77,185 113,205 717,771 - - 3,480,998

Year 18 3,480,998 104,430 153,164 754,534 - - 4,493,126

Year 19 4,493,126 134,794 197,698 793,097 - - 5,618,714

Year 20 5,618,714 168,561 247,223 1,825,664 - - 7,860,163

8

Beginning

of Year

Financial

Assets

Income

Financial

FLLC

Growth Distributions

Annual

Annuity

GRAT

Terminates

End of Year

Financial

Assets

Year 1

-

-

-

358,657

(358,657)

-

-

Year 2 - - - 358,657 (358,657) - -

Year 3 - - - 358,657 (358,657) - -

Schedule 7

George Generous

Hypothetical Technique #1: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to Charity; Contribute and Sell Growth and Financial Assets to

another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return - Financial Assets

7.40% Assumptions:

Generous FLLC Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0

3-Year GRAT

Grantor Trust for Generous Descendants (GRAT Remaindermen)

Beginning

of Year

Financial

Assets

Income

Financial

FLLC Beneficiary

Growth Distributions Distributions

Income

Taxes

End of Year

Financial

Assets

Year 1

-

-

-

-

-

-

-

Year 2 - - - - - - -

Year 3 - - - - - - -

Year 4 - - - - - - -

Year 5 - - - - - - -

Year 6 - - - - - - -

Year 7 - - - - - - -

Year 8 - - - - - - -

Year 9 - - - - - - -

Year 10 - - - - - - -

Year 11 - - - - - - -

Year 12 - - - - - - -

Year 13 - - - - - - -

Year 14 - - - - - - -

Year 15 - - - - - - -

Year 16 - - - - - - -

Year 17 - - - - - - -

Year 18 - - - - - - -

Year 19 - - - - - - -

Year 20 - - - - - - -

9

Assumptions:

Total Estimated Rate of Return - Financial Assets

7.40% Assumptions:

Generous FLLC Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0

Doing Good Donor Advised Fund

Schedule 7

George Generous

Hypothetical Technique #1: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to Charity; Contribute and Sell Growth and Financial Assets to

another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Beginning

of Year

Financial

Assets

Income

Preferred

Growth Distributions

Income

Taxes

End of Year

Financial

Assets

Year 1

-

-

-

420,000

-

420,000

Year 2 420,000 12,600 18,480 420,000 - 871,080

Year 3 871,080 26,132 38,328 420,000 - 1,355,540

Year 4 1,355,540 40,666 59,644 420,000 - 1,875,850

Year 5 1,875,850 56,275 82,537 420,000 - 2,434,663

Year 6 2,434,663 73,040 107,125 420,000 - 3,034,828

Year 7 3,034,828 91,045 133,532 420,000 - 3,679,405

Year 8 3,679,405 110,382 161,894 420,000 - 4,371,681

Year 9 4,371,681 131,150 192,354 420,000 - 5,115,185

Year 10 5,115,185 153,456 225,068 420,000 - 5,913,709

Year 11 5,913,709 177,411 260,203 420,000 - 6,771,324

Year 12 6,771,324 203,140 297,938 420,000 - 7,692,402

Year 13 7,692,402 230,772 338,466 420,000 - 8,681,639

Year 14 8,681,639 260,449 381,992 420,000 - 9,744,081

Year 15 9,744,081 292,322 428,740 420,000 - 10,885,143

Year 16 10,885,143 326,554 478,946 420,000 - 12,110,643

Year 17 12,110,643 363,319 532,868 420,000 - 13,426,831

Year 18 13,426,831 402,805 590,781 420,000 - 14,840,416

Year 19 14,840,416 445,212 652,978 420,000 - 16,358,607

Year 20 16,358,607 490,758 719,779 420,000 - 17,989,144

10

Beginning

of Year

Principal

Interest

Note

Payment

End of Year

Principal

Year 1

11,708,100

213,087

(213,087)

11,708,100

Year 2 11,708,100 213,087 (213,087) 11,708,100

Year 3 11,708,100 213,087 (213,087) 11,708,100

Year 4 11,708,100 213,087 (213,087) 11,708,100

Year 5 11,708,100 213,087 (213,087) 11,708,100

Year 6 11,708,100 213,087 (213,087) 11,708,100

Year 7 11,708,100 213,087 (213,087) 11,708,100

Year 8 11,708,100 213,087 (213,087) 11,708,100

Year 9 11,708,100 213,087 (213,087) 11,708,100

Year 10 11,708,100 213,087 (213,087) 11,708,100

Year 11 11,708,100 213,087 (213,087) 11,708,100

Year 12 11,708,100 213,087 (213,087) 11,708,100

Year 13 11,708,100 213,087 (213,087) 11,708,100

Year 14 11,708,100 213,087 (11,921,187) -

Year 15 - - - -

Year 16 - - - -

Year 17 - - - -

Year 18 - - - -

Year 19 - - - -

Year 20 - - - -

Schedule 7

George Generous

Hypothetical Technique #1: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to Charity; Contribute and Sell Growth and Financial Assets to

another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions:

Total Estimated Rate of Return - Financial Assets

7.40% Assumptions:

Generous FLLC Valuation Discount

35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0

Note Between George Generous and Financial FLLC

11

Schedule 7

George Generous

Hypothetical Technique #2: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to a 17.5 Year Grantor CLAT; Contribute and Sell Growth and

Financial Assets to Another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption

available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions:

Total Estimated Rate of Return - Financial Assets 7.40% Generous FLLC Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0 CLAT Payout Percentage 7.00%

George Generous Beginning

of Year

Financial

Assets

Income

Generous Financial

FLLC FLLC

Growth Distributions Distributions

Not

e

Payments

GRAT

Annuity

Payments

Charitable

Spending

Income

Taxes

End of Year

Financial

Assets

Year 1

2,000,000

60,000

88,000

4,200

3,623

213,087

358,657

-

(83,521)

2,644,045

Year 2 2,644,045 79,321 116,338 2,144 3,623 213,087 358,657 - (157,206) 3,260,010

Year 3 3,260,010 97,800 143,440 2,717 3,623 213,087 358,657 - (184,786) 3,894,548

Year 4 3,894,548 116,836 171,360 3,173 - 213,087 - - (209,812) 4,189,193

Year 5 4,189,193 125,676 184,324 3,555 - 213,087 - - (237,761) 4,478,074

Year 6 4,478,074 134,342 197,035 3,890 - 213,087 - - (263,172) 4,763,257

Year 7 4,763,257 142,898 209,583 4,196 - 213,087 - - (647,315) 4,685,707

Year 8 4,685,707 140,571 206,171 4,486 - 213,087 - - (691,811) 4,558,212

Year 9 4,558,212 136,746 200,561 4,768 - 213,087 - - (735,155) 4,378,221

Year 10 4,378,221 131,347 192,642 5,049 - 213,087 - - (778,299) 4,142,047

Year 11 4,142,047 124,261 182,250 5,333 - 213,087 - - (821,942) 3,845,037

Year 12 3,845,037 115,351 169,182 5,623 - 213,087 - - (866,609) 3,481,671

Year 13 3,481,671 104,450 153,194 5,923 - 213,087 - - (912,703) 3,045,622

Year 14 3,045,622 91,369 134,007 6,233 - 11,921,187 - - (960,544) 14,237,875

Year 15 14,237,875 427,136 626,467 6,557 - - - - (1,010,395) 14,287,640

Year 16 14,287,640 428,629 628,656 6,896 - - - - (1,062,483) 14,289,339

Year 17 14,289,339 428,680 628,731 7,951 - - - - (1,187,105) 14,167,596

Year 18 14,167,596 425,028 623,374 9,012 - - - - (1,316,686) 13,908,324

Year 19 13,908,324 417,250 611,966 9,376 - - - - (1,381,757) 13,565,159

Year 20 13,565,159 406,955 596,867 19,532 - - - - (2,425,614) 12,162,899

12

Growth Ownership

George

Generous

Financial

FLLC

1.0%

99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

Schedule 7

George Generous

Hypothetical Technique #2: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to a 17.5 Year Grantor CLAT; Contribute and Sell Growth and

Financial Assets to Another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption

available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions:

Total Estimated Rate of Return - Financial Assets 7.40% Generous FLLC Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0 CLAT Payout Percentage 7.00%

Generous FLLC Beginning

of Year

Financial

Assets

Income

Growth

Sale Preferred Growth

Proceeds Distributions Distributions

End of Year

Financial

Assets

Beginning

of Year

Securities

Sale

End of Year

Securities

End of Year

Financial

& Other

Assets

Year 1

14,000,000

420,000

616,000

6,000,000

(420,000)

(420,000)

20,196,000

6,000,000

(6,000,000)

-

20,196,000

Year 2 20,196,000 605,880 888,624 - (420,000) (214,424) 21,056,080 - - - 21,056,080

Year 3 21,056,080 631,682 926,468 - (420,000) (271,690) 21,922,539 - - - 21,922,539

Year 4 21,922,539 657,676 964,592 - (420,000) (317,276) 22,807,532 - - - 22,807,532

Year 5 22,807,532 684,226 1,003,531 - (420,000) (355,488) 23,719,801 - - - 23,719,801

Year 6 23,719,801 711,594 1,043,671 - (420,000) (389,013) 24,666,053 - - - 24,666,053

Year 7 24,666,053 739,982 1,085,306 - (420,000) (419,646) 25,651,695 - - - 25,651,695

Year 8 25,651,695 769,551 1,128,675 - (420,000) (448,628) 26,681,292 - - - 26,681,292

Year 9 26,681,292 800,439 1,173,977 - (420,000) (476,833) 27,758,875 - - - 27,758,875

Year 10 27,758,875 832,766 1,221,390 - (420,000) (504,893) 28,888,139 - - - 28,888,139

Year 11 28,888,139 866,644 1,271,078 - (420,000) (533,267) 30,072,594 - - - 30,072,594

Year 12 30,072,594 902,178 1,323,194 - (420,000) (562,300) 31,315,667 - - - 31,315,667

Year 13 31,315,667 939,470 1,377,889 - (420,000) (592,257) 32,620,769 - - - 32,620,769

Year 14 32,620,769 978,623 1,435,314 - (420,000) (623,347) 33,991,359 - - - 33,991,359

Year 15 33,991,359 1,019,741 1,495,620 - (420,000) (655,743) 35,430,977 - - - 35,430,977

Year 16 35,430,977 1,062,929 1,558,963 - (420,000) (689,591) 36,943,278 - - - 36,943,278

Year 17 36,943,278 1,108,298 1,625,504 - (420,000) (795,121) 38,461,959 - - - 38,461,959

Year 18 38,461,959 1,153,859 1,692,326 - (420,000) (901,189) 39,986,955 - - - 39,986,955

Year 19 39,986,955 1,199,609 1,759,426 - (420,000) (937,580) 41,588,410 - - - 41,588,410

Year 20 41,588,410 1,247,652 1,829,890 - (420,000) (1,953,220) 42,292,732 - - - 42,292,732

13

Ownership

George

Generous

GRAT &

Grantor

Trust

1.0%

99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

1.0% 99.0%

Schedule 7

George Generous

Hypothetical Technique #2: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to a 17.5 Year Grantor CLAT; Contribute and Sell Growth and

Financial Assets to Another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption

available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions:

Total Estimated Rate of Return - Financial Assets 7.40% Generous FLLC Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0 CLAT Payout Percentage 7.00%

Financial FLLC Beginning

of Year

Financial

Assets

Income

Generous

FLLC

Growth Distributions

Note Owner

Payments Distributions

End of Year

Financial

Assets

Year 1

4,000,000

120,000

176,000

415,800

(213,087)

(362,279)

4,136,433

Year 2 4,136,433 124,093 182,003 212,280 (213,087) (362,279) 4,079,443

Year 3 4,079,443 122,383 179,495 268,973 (213,087) (362,279) 4,074,928

Year 4 4,074,928 122,248 179,297 314,103 (213,087) - 4,477,488

Year 5 4,477,488 134,325 197,009 351,933 (213,087) - 4,947,668

Year 6 4,947,668 148,430 217,697 385,123 (213,087) - 5,485,831

Year 7 5,485,831 164,575 241,377 415,450 (213,087) - 6,094,145

Year 8 6,094,145 182,824 268,142 444,142 (213,087) - 6,776,166

Year 9 6,776,166 203,285 298,151 472,065 (213,087) - 7,536,580

Year 10 7,536,580 226,097 331,609 499,844 (213,087) - 8,381,043

Year 11 8,381,043 251,431 368,766 527,934 (213,087) - 9,316,086

Year 12 9,316,086 279,483 409,908 556,677 (213,087) - 10,349,066

Year 13 10,349,066 310,472 455,359 586,334 (213,087) - 11,488,144

Year 14 11,488,144 344,644 505,478 617,114 (11,921,187) - 1,034,193

Year 15 1,034,193 31,026 45,504 649,185 - - 1,759,908

Year 16 1,759,908 52,797 77,436 682,695 - - 2,572,837

Year 17 2,572,837 77,185 113,205 787,170 - - 3,550,397

Year 18 3,550,397 106,512 156,217 892,177 - - 4,705,303

Year 19 4,705,303 141,159 207,033 928,204 - - 5,981,700

Year 20 5,981,700 179,451 263,195 1,933,688 - - 8,358,034

14

Schedule 7

George Generous

Hypothetical Technique #2: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to a 17.5 Year Grantor CLAT; Contribute and Sell Growth and

Financial Assets to Another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption

available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions:

Total Estimated Rate of Return - Financial Assets 7.40% Generous FLLC Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0 CLAT Payout Percentage 7.00%

3-Year GRAT

Beginning

of Year

Financial

Assets

Income

Financial

FLLC

Growth Distributions

Annual

Annuity

GRAT

Terminates

End of Year

Financial

Assets

Year 1

-

-

-

358,657

(358,657)

-

-

Year 2 - - - 358,657 (358,657) - -

Year 3 - - - 358,657 (358,657) - -

Grantor Trust for Generous Descendants (GRAT Remaindermen)

Beginning

of Year

Financial

Assets

Income

Financial

Preferred FLLC Beneficiary

Growth Distributions Distributions Distributions

Income

Taxes

End of Year

Financial

Assets

Year 1

-

-

-

-

-

-

-

-

Year 2 - - - - - - - -

Year 3 - - - - - - - -

Year 4 - - - - - - - -

Year 5 - - - - - - - -

Year 6 - - - - - - - -

Year 7 - - - - - - - -

Year 8 - - - - - - - -

Year 9 - - - - - - - -

Year 10 - - - - - - - -

Year 11 - - - - - - - -

Year 12 - - - - - - - -

Year 13 - - - - - - - -

Year 14 - - - - - - - -

Year 15 - - - - - - - -

Year 16 - - - - - - - -

Year 17 - - - 210,000 - - - 210,000

Year 18 210,000 6,300 9,240 420,000 - - - 645,540

Year 19 645,540 19,366 28,404 420,000 - - - 1,113,310

Year 20 1,113,310 33,399 48,986 420,000 - - - 1,615,695

15

Schedule 7

George Generous

Hypothetical Technique #2: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to a 17.5 Year Grantor CLAT; Contribute and Sell Growth and

Financial Assets to Another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption

available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions:

Total Estimated Rate of Return - Financial Assets 7.40% Generous FLLC Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0 CLAT Payout Percentage 7.00%

17.5-Year Charitable Lead Annuity Trust

Beginning

of Year

Financial

Assets

Income

Preferred Charitable

Growth Distributions Contribution

Income

Taxes

End of Year

Financial

Assets

Year 1

-

-

-

420,000

(420,000)

-

-

Year 2 - - - 420,000 (420,000) - -

Year 3 - - - 420,000 (420,000) - -

Year 4 - - - 420,000 (420,000) - -

Year 5 - - - 420,000 (420,000) - -

Year 6 - - - 420,000 (420,000) - -

Year 7 - - - 420,000 (420,000) - -

Year 8 - - - 420,000 (420,000) - -

Year 9 - - - 420,000 (420,000) - -

Year 10 - - - 420,000 (420,000) - -

Year 11 - - - 420,000 (420,000) - -

Year 12 - - - 420,000 (420,000) - -

Year 13 - - - 420,000 (420,000) - -

Year 14 - - - 420,000 (420,000) - -

Year 15 - - - 420,000 (420,000) - -

Year 16 - - - 420,000 (420,000) - -

Year 17 - - - 210,000 (210,000) - -

Year 18 - - - - - - -

Year 19 - - - - - - -

Year 20 - - - - - - -

16

Schedule 7

George Generous

Hypothetical Technique #2: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to a 17.5 Year Grantor CLAT; Contribute and Sell Growth and

Financial Assets to Another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption

available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions:

Total Estimated Rate of Return - Financial Assets 7.40% Generous FLLC Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0 CLAT Payout Percentage 7.00%

Doing Good Donor Advised Fund

Beginning

of Year

Financial

Assets

Income

Charitable

Growth

Contributio

n

Income

Taxes

End of Year

Financial

Assets

Year 1

-

-

-

420,000

-

420,000

Year 2 420,000 12,600 18,480 420,000 - 871,080

Year 3 871,080 26,132 38,328 420,000 - 1,355,540

Year 4 1,355,540 40,666 59,644 420,000 - 1,875,850

Year 5 1,875,850 56,275 82,537 420,000 - 2,434,663

Year 6 2,434,663 73,040 107,125 420,000 - 3,034,828

Year 7 3,034,828 91,045 133,532 420,000 - 3,679,405

Year 8 3,679,405 110,382 161,894 420,000 - 4,371,681

Year 9 4,371,681 131,150 192,354 420,000 - 5,115,185

Year 10 5,115,185 153,456 225,068 420,000 - 5,913,709

Year 11 5,913,709 177,411 260,203 420,000 - 6,771,324

Year 12 6,771,324 203,140 297,938 420,000 - 7,692,402

Year 13 7,692,402 230,772 338,466 420,000 - 8,681,639

Year 14 8,681,639 260,449 381,992 420,000 - 9,744,081

Year 15 9,744,081 292,322 428,740 420,000 - 10,885,143

Year 16 10,885,143 326,554 478,946 420,000 - 12,110,643

Year 17 12,110,643 363,319 532,868 210,000 - 13,216,831

Year 18 13,216,831 396,505 581,541 - - 14,194,876

Year 19 14,194,876 425,846 624,575 - - 15,245,297

Year 20 15,245,297 457,359 670,793 - - 16,373,449

17

Schedule 7

George Generous

Hypothetical Technique #2: Creation of an FLLC with Growth and Preferred Interests; Gift of Preferred to a 17.5 Year Grantor CLAT; Contribute and Sell Growth and

Financial Assets to Another FLLC; Contribute Non-Managing Interest to a GRAT; Bequeaths Estate to Family (assumes $8.69mm inflation adjusted estate tax exemption

available at death This is a hypothetical illustration of mathematical principles and is not a prediction or projection of performance of an investment or investment strategy.

This material is based on the assumptions stated herein. In the event any of the assumptions used do not prove to be true, results are likely to vary substantially from the examples shown herein. These examples are for illustrative purposes only and no representation is

being made that any client will or is likely to achieve the results shown.

Assumptions: Assumptions:

Total Estimated Rate of Return - Financial Assets 7.40% Generous FLLC Valuation Discount 35.00%

Rate of Return Taxed at Ordinary Rates - Financial Assets 3.00% Generous FLLC Preferred $6,000,000

Rate of Return Taxed at Capital Gains Rates - Financial Assets 4.40% Generous FLLC Preferred Coupon 7.00%

Turnover Rate - Financial Assets (% of Capital Gains Recognized/Year) 30.00% Holdco FLLC Valuation Discount 20.00%

Long-Term Capital Gain Tax Rate 25.00% IRS 7520 Rate 2.20%

Ordinary Income Tax Rate 44.60% Intra-Family Interest Rate - Mid-Term (August 2015) 1.82%

Charitable Spending $0 CLAT Payout Percentage 7.00%

Note Between George Generous and Financial FLLC

Beginning

of Year

Principal

Interest

Note

Payment

End of Year

Principal

Year 1

11,708,100

213,087

(213,087)

11,708,100

Year 2 11,708,100 213,087 (213,087) 11,708,100

Year 3 11,708,100 213,087 (213,087) 11,708,100

Year 4 11,708,100 213,087 (213,087) 11,708,100

Year 5 11,708,100 213,087 (213,087) 11,708,100

Year 6 11,708,100 213,087 (213,087) 11,708,100

Year 7 11,708,100 213,087 (213,087) 11,708,100

Year 8 11,708,100 213,087 (213,087) 11,708,100

Year 9 11,708,100 213,087 (213,087) 11,708,100

Year 10 11,708,100 213,087 (213,087) 11,708,100

Year 11 11,708,100 213,087 (213,087) 11,708,100

Year 12 11,708,100 213,087 (213,087) 11,708,100

Year 13 11,708,100 213,087 (213,087) 11,708,100

Year 14 11,708,100 213,087 (11,921,187) -

Year 15 - - - -

Year 16 - - - -

Year 17 - - - -

Year 18 - - - -

Year 19 - - - -

Year 20 - - - -